Elon Musk may be the world’s richest man, but that doesn’t mean he has a lot of money.
With much of his wealth tied up in stock holdings, he’s financing his $44 billion purchase of Twitter in part by borrowing against his shares in Tesla — tying the fortunes of the carmaker, the main source of his wealth, to those of the volatile and barely profitable social media site.
Success would make the richest man who has ever lived richer still. Failure could increase the amount of Tesla stock he is leveraging, creating problems for both Musk and the car company. Despite Musk’s optimism, others have tried and failed to raise Twitter’s profits to match its outsized influence.
“For a variety of reasons, Musk’s ownership of Twitter poses the risk of being a significant risk to Tesla,” said Howard Fischer, a former senior trial counsel at the Securities and Exchange Commission and a partner at law firm Moses & Singer.
The Tesla financing
Paperwork that Musk filed with the SEC last month outlined his plan to buy Twitter using $21 billion of his own money, plus $25.5 billion in loans — nearly half through a $12.5 billion personal loan issued against Musk’s Tesla holdings. (The value of the stock offered as collateral is roughly five times that of the loan amount.)
Musk sold off $8.4 billion in Tesla shares on April 29, seemingly to finance the deal, causing its price to slide; the billionaire promised to not sell more. If the value of Tesla stock dropped significantly and banks issued a margin call on the loans, he would have to put up much more Tesla stock than initially expected.
Perhaps because of this, Musk now appears to be exploring ways to lessen his personal financial risk related to the pending purchase. An SEC filing published Thursday revealed that Musk has secured $7.14 billion in commitments from investors, including software billionaire Larry Ellison and venture capital firm Sequoia Capital, and reduced his personal loan to $6.25 billion.
Tesla stock was up Tuesday but is down around 25 percent year to date and about 5 percent over the last five days. Musk owns about 15.6 percent of the company, which has a market cap of about $942 billion.
Fischer said Twitter does not earn enough to pay off the debt proposed to finance the deal, and that is not likely to change immediately, if ever. Twitter’s net cash provided by operating activities at the end of Q1 2022 was $633 million, a 36 percent decline year-over-year, and that cash flow is being used to secure a $13 billion loan. Bloomberg has estimated that the annual payments on the loans Musk is leveraging to purchase Twitter could amount to $1 billion in personal interest payments a year, and that money has to come from somewhere. It seemingly would not come from Twitter revenue, if current trends continue.
Musk has floated various ideas of how to up Twitter’s earnings, including subscriptions, making companies pay to embed tweets (and demonstrating a lack of understanding of copyright law in the process) and slashing executive pay. Some observers are skeptical he can achieve profitability through these means, given they also go against some of Twitter’s core appeals.
“Musk’s various statements about lowering head counts and not caring about advertising likely mean significant turmoil at least in the near future at Twitter, likely leading to lower earnings,” said Fischer. “The market is likely to react to these facts by assuming that Musk will have to sell shares of Tesla, or pledge more shares to secure his financing, which will put significant downward pressure on Tesla stock.”
This would turn the two companies into odd bedfellows, where Twitter’s performance, or lack thereof, might influence Tesla’s stock price. While other billionaires have bought media companies — Jeff Bezos famously snapped up the Washington Post — those purchases generally haven’t posed a risk to those buyers’ core businesses, such as Amazon for Bezos.
Tim Galpin, a senior lecturer at the Saïd Business School at the University of Oxford, was more skeptical of the notion that the deal would directly link the two companies.
“They are two different companies with different business models,” he said. “The only obvious ‘link’ between the two is the potential reputational impact of Musk.”
The relationship between the companies is much more tenuous, Brian Quinn, an associate professor at Boston College Law School, said, and it comes to down to Musk’s ability — or inability — to pay interest on his personal loan.
“Interest can come either from dividends he is able to pull out of Twitter or by sales of the collateral,” Quinn said. “If Musk is unable to generate sufficient cash from Twitter to pay the interest on the margin loans, then Musk will have to generate the cash from somewhere else to do that. If he’s a forced seller of Tesla stock, then that might drag the Tesla stock price a bit.” Similarly, while Musk has already sold some Tesla stock to come up with $21 billion in cash for the Twitter deal, he’ll likely have to sell more or secure the money through margins on his Tesla holdings, Quinn added.
“In general, if Twitter is doing poorly, that will likely drag Tesla stock, but not too much since there are limits on Musk’s ultimate liability with reference to Twitter,” Quinn said.
That raises questions about what Tesla’s board is doing, if anything, to brace the company against shocks from Musk’s Twitter deal, Fischer said. He’s skeptical that Musk’s ownership of Twitter could help Tesla — and ticked off many instances where it would likely pose significant risks.
“What if statements on Twitter anger China, will China limit Tesla sales in that market?” said Fischer. “Just look at China’s reaction to the NBA after criticisms of China by some NBA employees. If Tesla faces downward share price pressures because of Musk’s ownership of Twitter, I can see significant liability for Tesla’s board based on lawsuits by unhappy investors.”
Musk and Tesla are already facing lawsuits from shareholders over his 2018 tweets about taking Tesla private. The deal never materialized, and he was charged with securities fraud by the SEC. He settled with the SEC through a consent decree, in which he and Tesla each paid a fine of $20 million, and he stepped down as chairman of the board for three years and agreed not to deny the allegations of the SEC complaint. He also had to have his tweets vetted if they contained material likely to affect Tesla’s share price. He recently lost a bid to end that portion of the consent decree.
Musk refuses to holster his Twitter fingers
With closure of the purchase still months away by most estimates, there also are several ways the deal could fall apart. One of the unique provisions in Musk’s contract to purchase Twitter is that it bars him from tweeting anything that “disparage[s] the Company or any of its Representatives.”
Yet Musk sent a variety of tweets out late last week that seemingly fell into that category, multiple lawyers told Grid.
Musk had previously called Twitter’s top lawyer, Vijaya Gadde, the company’s “top censorship advocate” and tweeted out a meme that suggested her and Twitter’s decision-making was influenced by left-wing bias. He also weighed in on conspiracy theories involving another lawyer at Twitter.
Some of Musk’s 90 million Twitter followers and other users of the site responded by targeting the Twitter employees with harassment, including tweets at Gadde to “just quit you scum” and “WHITE POWER WHITE PRIDE!”
“By any fair reading of the deal, he has probably violated those specific anti-disparagement terms,” said Fischer. “I also believe that it’s not going to make a difference and that they are not going to use this as a reason for the sale not to go through.”
Quinn said that it’s unlikely that Twitter will try to enforce the nondisparagement clause, however.
“Nothing’s going to come of that, because really the only thing that Twitter can do is sue for breach of contract,” said Quinn, who focuses on focuses on corporate law, mergers and acquisitions, the structuring of transactions, transactional law, and private ordering. “They’re not going to walk away from the deal because he may have breached this particular provision.”
But Musk’s behavior could be poisoning the well with Twitter’s rank and file. At a town hall last week, employees raised concerns about their abilities to do their jobs if Musk targeted them for harassment. It may be an indication of how he plans to run the company — and the backlash to that could be its own major challenge to the success of a Musk-run Twitter.
Thanks to Lillian Barkley for copy editing this article.
This article has been updated.