The Twitter endgame

We’re not paying enough attention to the financing of Elon Musk’s Twitter purchase. It explains why he’s flailing now, and points to a shocking future for the social network.

Where did Musk get the money to buy Twitter, and why does it matter?

Of the $44 billion it took to buy Twitter, about $24 billion came from Musk. Another $7 billion came from investors who got equity (Twitter shares); these include Oracle founder Larry Ellison for $1 billion and Saudi investor Alwaleed bin Talal for $1.9 billion.

About $13 billion is in the form of loans from banks including Bank of America, Barclay’s, and Morgan Stanley. As is typical in a leveraged buyout, the loans are secured by Twitter, the company, not by Musk.

The Washington Post estimates that the loans require payments of approximately $1 billion per year.

For reference, Twitter generated $5 billion in revenue in 2021 and rather than profit, a loss of $221 million. The previous year it generated $3.7 billion and lost over a $1 billion.

If Musk’s Twitter can’t pay the loans, the banks take over the company.

In search of a massive revenue-generating miracle

Observers are certainly wondering why Musk’s Twitter is flailing so radically. He laid off half the company, leaving 3,700. The he proposed that employees either work day and night or leave with three months severance; another 1,200 quit. He put verified badges up for sale at $8 a month. And he restored accounts for users banned for inciting violence and hate speech, including Donald Trump and Ye (formerly Kanye West).

Why make such moves? And why in such a hurry?

Because Musk needs a massive revenue generating miracle (MRGM). And he needs it in a hurry.

Cutting staff to the bone is risky. This thread lists 50 things that could go wrong, nearly all of which would cripple the service.

The current revenues nearly all come from advertising. But given the volatility, advertisers are fleeing. And Musk just fired his ad sales leader.

In the next few months, after the company pays all that severance, the expenses will be way down. But revenues will, too.

Musk will try everything possible to build revenue, but that depends on having a working site and figuring out something to sell that lots of people want to pay for. He’s performed miracles before. But it seems like a long shot that six months from now, this site will somehow tap into the gusher of money it needs to fend off the banks that hold the loans.

What happens after the bankers take over?

Musk probably won’t find his MRGM. So what happens then?

Where could he get money to pay off the bankers?

He could sell equity in Tesla or SpaceX. But I think he’s exhausted his appetite for spending his own money. Trashing the valuations of his other companies to fund Twitter is not a likely scenario.

Could sell shares in Twitter to somebody and retain control? I doubt it. If such investors existed, he would have tapped them before the original purchase. Who’s going to buy in now, when the company is at risk of failing at any moment?

Could he find somebody else to get a loan from? Given that his original lenders are now getting offers of 60 cents on the dollar for their Twitter loans, that’s doubtful.

Could he ask the bankers to just be patient while he figures out his MRGM? Bankers aren’t patient. The people who want to wait around and see if Musk could pull a miracle invested in equity, not loans. Lenders want money. And if they don’t get it, they take over.

In this endgame, the bankers take possession of Twitter, put it through bankruptcy, and then sell the carcass for whatever they can get. Musk will no longer be in charge, and they’ll have no interest in his long-term ambitions for the site.

Who would buy the remains of Twitter?

What assets does Twitter have that are worth anything?

There are two.

The first is the source code, which allows any buyer to revive Twitter or duplicate it.

The second is the social graph — the set of users, handles, tweets, and who-follows-who relationships.

Who would find that valuable?

I see three possibilities.

First, another social media company could restart Twitter from that base. Facebook can’t touch it for antitrust reasons. TikTok probably wouldn’t be able to either, because regulators will never let a Chinese company take over Twitter. But Snap or Pinterest could buy it. At the right price, Match group (parent company of, Tinder, Hinge, and other dating sites) might want it. Such buyers would find lots of value in the social graph and ways to connect their own social media assets to Twitter’s users.

Second, a traditional media or tech company might buy it. Traditional companies have been awful at social media (remember when News Corp. bought MySpace?). But at the right price (after Twitter has imploded, probably just a billion or two), it may just be too tempting for Paramount, Apple, or Netflix. Such a buyer would likely “reboot” Twitter and sanitize it, creating a Facebook competitor.

Finally, consider who is right now desperate to own a social network. Donald Trump. His TRUTH Social is failing. I bet he could get financiers to back him to outbid other social networks and turn Twitter into what he wanted all along: a social network that plays by his rules. His staff will just swallow Twitter into TRUTH and suck up all the users. Even if two-thirds of the users quit, he’s still tens of millions of people ahead of the reported 2 million users on TRUTH Social.

Remember, the bankers don’t care. They’ll sell to the highest bidder in an attempt to get as much of their money back as possible. What the buyer does with it is the next guy’s problem.

Things look bad right now for Twitter. But it can always get worse.

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  1. Or, he could turn Twitter into what Trump wanted Truth Social to be: a vibrant social network for the MAGA crowd. An ad model would be tough here (other than for political candidates), but people might pay a lot to be members and get the chance to hobnob with their idols.

  2. Alas, Josh, it’s not going to be quite that simple on the debt front. Sure, if Musk violates the covenants (which include interest payments, presumably) the lenders do have recourse. But taking over the business is a *last* resort, not the first move from the lenders. They *really* don’t want to own this asset.

    First, he’ll seek to PIK (payment in kind) the interest – that is, add it on to the debt. And the lenders will probably say yes. In exchange, they’ll seek additional fees (which they’ll get) and a higher interest rate (which they’ll probably also get).

    That will buy some meaningful (4-6 quarters?) of breathing room. And then…well, I’m as skeptical as you are about pulling a rabbit out of the hat here.

    So, the lenders will seek some form of equity cure – essentially, ask Musk and his compatriots to inject more equity. Which…they will likely do. Good money after bad? Too soon to tell.

    Anyway, will be interesting to watch…

  3. What if this whole scorched earth thing is actually Musk’s strategy? He was all for buying Twitter until he wasn’t. Then he was all for cancelling the sale until he couldn’t. So even though the courts forced him to follow through, once it’s his he can do whatever he wants, including killing it. He burns some bridges and takes a (probably short-term) hit to his credibility. He can afford losing a few billion here and there. But people will eventually forget, the banks will take their burned-out husk of a platform and pawn it off to the highest bidder – maybe somebody Josh mentioned above – and no harm, no foul. Except of course to the employees who lost their jobs, the human rights activists across the world who lose their voice, and the many people who made the good parts of Twitter actually good.