Elon Musk's Twitter Takeover Explained...

Elon Musk, the world's richest person, is currently attempting the most controversial takeover the world has ever seen. Using the power of his extremely high net worth, he's trying to buy Twitter outright and take the company private to make changes to the platform. But despite an extremely generous offer put forward by Musk, the Twitter board are now scrambling to try and stop this deal going through.

So why is this happening, and who stands to win or lose? Well, let's find out.

Last night, Musk offered to buy Twitter for 43 billion dollars. "I could technically afford it." He transformed himself into the most powerful Twitter troll of all time. Musk tweeted, of all things, a very sharp criticism: "Twitter needs to be transformed as a private company. A public platform that is broadly inclusive is extremely important to the future of civilization." He's going to take a machete to the Twitter that we know today. "Tell me we all wish we didn't have that power, huh?" So if you're an employee, you're scared to death.

It all started back on March 25th, 2022. After polling his 82 million Twitter followers and discovering that 70.4 percent of respondents believe Twitter does not uphold the principles of free speech, Elon set in motion a plan to become the largest individual shareholder of Twitter to be able to suggest changes to the management team to improve the platform. On April 4, he bought 9.2% of the company for 2.9 billion dollars and immediately started taking feedback from Twitter users as to how the platform should be improved. He tweeted out a poll to discuss whether Twitter should add an edit button while also discussing possible changes and improvements to Twitter Blue and the authentication checkmark system.

But at this point, there was definitely an elephant in the room. A 9.2% stake, while significant, doesn't give Elon any sort of control over Twitter's direction. Without a controlling stake or representation on the board of directors, that controlling power stays firmly with the CEO and with the board. So with Elon already acting like he owned the company, questions were being asked as to whether he would be satisfied with a mere 9.2% ownership stake, particularly if the Twitter board decided not to act on his suggestions.

Interestingly, the first person to sense this impending power struggle was Twitter's CEO, Parag Agrawal. Sensing Elon would be rather serious in his pursuit of changes to Twitter's platform, he put forward a rather cunning deal to Mr. Elon Musk. He agreed to offer Elon a seat on Twitter's board—so a seat at the decision-making table—but in exchange, Elon must agree to limit his ownership stake to 14.9% of the company. No more. This would allow Elon to legitimately voice his opinion but would also keep him at arm's length, as the board of directors could easily overpower his ideas if needed. Plus, Elon wouldn't have the option of using his extreme wealth to simply buy up more shares, take over the company, and clear out the management.

It's pretty smart: give Elon what he wants and at the same time quell any possibilities of losing your job. And Musk initially agreed to these terms. He accepted the offer and was set to join the board officially on Saturday, the 9th of April. Bullet dodged for our friend Parag—or so he thought. Because just a few days later, on the very morning Elon was set to join Twitter's board, he notified the Twitter management that the deal was off.

Just a few days later, he instead offered to buy the entire company for 43 billion dollars, effectively 54.20 per share, representing a 54% premium to the share price on January 28th, which is the day before Elon started buying shares in the company, and a 38% premium over the stock price on the first of April, which was the day before Elon's Twitter stake was publicly announced. Hmm, the plot thickens.

Unfortunately, it doesn't sound promising for our friend Parag. This is where things start to get really interesting. Twitter will block a hostile takeover bid by billionaire Elon Musk. It's a defensive move by the company—their sense of job security has dramatically gone down. If they don't sell it to him for that price, he's got an incredible basis to sue their britches off. If Musk can't buy Twitter, this just proves the game is rigged, and it proves how deep the corruption goes.

You see, the CEO and the board of directors of a public company must act in the best interests of the company's shareholders—that's the law. They have a fiduciary responsibility. This is why most buyout offers get accepted. A big corporation will make a very handsome offer to buy the company, which is usually 20% to 50% over the current share price. This represents huge potential gains for shareholders, and the board can't argue against accepting the offer for their shareholders.

But every so often, you get a special case where a company doesn't want to be acquired and they will attempt to thwart the acquisition. You guessed it: Parag Agrawal and the Twitter board of directors are trying to thwart Elon's takeover bid as we speak. But why would they do this?

Well, there's one legitimate reason and one illegitimate reason. The legitimate reason why management might turn down a generous offer for acquisition is that they're doing such a great job themselves that shareholders can genuinely expect to see their company growing past the takeover valuation in the not-too-distant future. For example, if you had a lemonade stand valued at 100, but you're growing your sales by 50% every summer, you might very well turn down an acquisition offer of merely 150, despite that being a 50% premium.

But unfortunately, in the case of Twitter, their business really isn't going anywhere. Over the past 10 years, their net income has moved from negative 79 million to negative 221 million, while their free cash flows moved from negative 79 million all the way up to 869 million and then all the way back down to negative 370 million. So that leads us now to the less legitimate reason for blocking an acquisition, which is that an inefficient management team are fearing that they probably won't keep their jobs once the company is acquired.

This makes sense, as Elon Musk has already explicitly stated that he has no confidence in Twitter's current management team. So I think it's fair to say that for the Twitter management, you know, the writing's on the wall. Thus, for them to survive, they need to try every trick in the book to stop the Elon Musk takeover—even if it goes against the best interests of Twitter shareholders.

So that leads us to the question: what are they doing right now? Well, in an attempt to thwart the takeover, the board unanimously voted to adopt a limited duration shareholder rights plan, colloquially known as a poison pill. CNBC notes that under the new structure, if any person or group acquires beneficial ownership for at least 15% of Twitter's outstanding common stock without the board's approval, other shareholders will be allowed to purchase additional shares at a discount. Essentially, if Elon starts buying up shares on the open market to attempt a hostile takeover, once he hits 15% ownership, existing shareholders will be allowed to buy shares from the company at a cheaper price.

The idea here is that this will create a lot of new shares that Elon will now also have to go out and buy in order to get the acquisition done. Sure, it's going to dilute the shareholders that choose not to take part, but don't worry, guys, we're doing this for you, we promise.

But it's also worth noting that this is just level one on the poison pill scale. Other tactics could also be implemented if things get even more desperate. For example, a generous employee stock option plan could be put into place that only vests if the company is acquired. Thus, the acquired version of the company looks much less desirable than the company as it stands today, as the cost will be higher and it might be harder to retain those employees going forward.

Or worse, the management team could even introduce a golden parachute clause if they wanted to, so that if Elon were to take over the company and fire the management, this triggers a huge bonus package that would both financially impair the company moving forward and financially benefit the lackluster management as they get cleared out.

As you can probably tell, there are lots of sneaky ways they could deter a potential acquirer. But the problem is they aren't good for the long-term shareholders. As you can tell by the name, poison pills are specifically designed to financially impair the company in the event of an acquisition, so that potential acquirers really think twice before going through with it.

But rest assured, this dishonest behavior is not without consequence. It's fair to say that the Twitter management team are certainly feeling the pressure right now. Shareholders are demanding an explanation as to why they won't accept Elon Musk's offer, and Elon Musk continues to call out their deceptive tactics. Last Thursday, he tweeted, "It would be utterly indefensible not to put this offer to a shareholder vote. They own the company, not the board of directors."

He added, "If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty. The liability they would thereby assume would be titanic in scale." And he's right: the shareholders are the ones that deserve to decide; it's their company after all, and they stand to benefit greatly from Musk's generous buyout offer.

This might have you wondering: well, if the shareholders benefit, wouldn't the Twitter management team also benefit greatly from this offer? Don't they own a heap of stock themselves? They're the management team. For example, Tim Cook, the CEO of Apple, might make 3 million bucks in base salary each year, but he owns 3.28 million shares worth 541 million dollars. If someone were to buy out Apple for a 38% premium, he'd make more money in that one transaction than a career's worth of salary payments.

Well, the extremely odd thing about Twitter's management team is that they have next to no skin in the game. They run this company, but they're almost completely immune to the impacts of their own decisions. As you can see by this chart which surfaced on Twitter a few days ago, none of the Twitter board members actually stand to benefit greatly from Elon Musk's offer, as they simply don't own any stock. This is very rare to see; it's actually quite a big red flag in the investing world generally.

But in this context, it shows you exactly the situation the management are facing. They don't benefit very much from the buyout offer, and in fact, their job security is at very high risk if the buyout goes through. So while it's rather dishonest, you can definitely understand exactly why the Twitter management team are doing what they're doing.

But with that said, let me know what you think. Should the management have the power to implement a poison pill without shareholder approval? Do you think they should put Musk's offer before the shareholders? Do you think there might be a legitimate reason why they would move to act in blocking the takeover? Definitely let me know your opinion down in the comments section below.

Of course, like the video if you enjoyed, subscribe to see more, and if you're interested in a deep dive into another controversial social media company, Meta, be sure to check out the video coming up on the screen right now. But with that said, guys, thanks for watching, and I'll see you in the next video.

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