My answer to the first question is “most likely yes”, and my answer to the second question is “it depends”. My answers are based on the following:
Elon Musk has put the company in play. Since TWTR has i) limited management / Board (i.e. insider) ownership, ii) no well-articulated strategy from management as to how to improve the company’s operating performance, and iii) disappointing share price performance over many years, I suspect many investors will be keen to see the company sold.
Mr Musk will probably need financing assistance. It’s not that he might not be able to pay the full price of $43.2 billion himself since he is one of the wealthiest people in the world, but it seems to me like his bid would have more credibility if it were involved in an equity syndicate with experienced investors (in social media), and / or his bid was backed by (debt) financing from a well-recognised group of banks or debt funds.
I think the poison pill defence adopted by the Board of TWTR is a ploy to force Mr Musk or an alternative bidder to raise the acquisition price/share of TWTR. The thought of TWTR management credibly thinking that they can keep the company independent and enhance shareholder value isn’t really plausible given the share performance, not to mention that there seems to be limited confidence amongst TWTR’s shareholders that the company is moving in a positive direction.
Other bidders are likely to surface, either larger ones (e.g. private equity / investment firms) at a similar price to Mr Musk but with more credibility in running social media / tech companies, or bidders at a higher price that are considered friendly to management (whereas Mr Musk’s bid is considered hostile, or on the verge of being so). Looking at the metrics and current level of TWTR’s share price, I think other buyers will surface at a higher price.
The bottom line is that I think TWTR will get sold but quite possibly not to Mr Musk.
Let me drill into a few more details. But before I do so, if you would like to learn more about the technical details of how this situation might play out, including how a poison pill defence works, I suggest you read Matt Levine’s excellent piece in Bloomberg Opinion here: “Twitter Has a Poison Pill Now.”
TWTR share performance
Below is a graph from YahooFinance.com that shows TWTR’s stock price history since the company went public on November 7th, 2013.
As you can see in this chart, the price migration since the IPO nearly nine years ago has been highly volatile but generally range-bound and poor. TWTR sold 70 million shares at $26/share in its IPO on November 7th, 2013, raising circa $1.8 bln. The company’s shares closed on their first day of trading at $44.90/share, which valued the company at over $24 bln at the close. For reference, TWTR had $317 million of sales in 2012 (vs. $5.1 billion of sales for Y/E 12/31/21) and lost $79.4 million (vs adjusted bottom-line profit of $273 million for Y/E 12/31/21). The return for shareholders from the day the company was listed until now depends on whether you were one of the privileged few that got in at the IPO price, or if your entry point was closer to the closing price on the day of the IPO.
Even if you managed to get in at the IPO price (of $24/share), your return has trailled the returns of both the S&P 500 and the NASDAQ Composite over this period as you can see in the table below.
The S&P 500 has increased 11.5%/annum and the NASDAQ Composite has increased 15.7%/annum since TWTR’s IPO date of Nov 7th 2013, whilst TWTR has increased only 9.0%/annum assuming shareholders get cashed out at Elon Musk’s current offer price (i.e. $54.20/share). The stock has been as high as (over) $80/share (Feb 2021) and as low as $14/share (June 2016). However, almost any way you slice it, the company has not delivered a decent return for its shareholders over much of this period.
Comparables and valuations
TWTR has seen significant revenue growth since it went public, but its profitability has been volatile. TWTR went from loss-making to bottom-line profitable in 2018 and 2019, but returned to loss-making in 2020 (pandemic) and 2021. 2021’s loss was related to an unusual litigation cost in 3Q2021, or the company would had otherwise been profitable for the full year. In the valuation table below, I have used adjusted EBITDA and net income for TWTR for 2021. I have done something similar for SNAP.
In looking at the valuation of TWTR, I looked at three price points – the price/share before Mr Musk made his bid, the price at today’s close (April 18th 2022), and the price which is the offer price from Mr Musk to buy the company. The valuation multiples for TWTR are compared to three other social media companies – SNAP, FB and GOOG. Lastly, although a different slice of tech, I looked at the pending MSFT friendly purchase of ATVI.
Compared to the three social media companies, two of which are substantially larger and more profitable, the EV-to-forward revenues of TWTR at Mr Musk’s offer price certainly looks fair and arguably even slightly cheap. It is hard to make a lot of EBITDA and earnings ratios since TWTR has gyrated back and forth between profitable and unprofitable, although – as mentioned above – I used adjusted EBITDA and Net Income for SNAP, too. SNAP’s multiples (to forward revenues and trailing EBITDA) suggest that TWTR’s value could be higher, in the neighbourhood of $58 to $60 per share.
Although not social media per se, I included MSFT’s acquisition of ATVI, which is friendly and will eventually happen at the offer price agreed in January of $95/share. MSFT is paying a richer price for a slower-growing albeit more consistently profitable gaming company, a very different slice of technology, but still one worth noting. I find it interesting that the current price of ATVI – most recently $79.06/share – is still only 83.2% of the headline offer price of $95/share, even though this acquisition is friendly and is almost certain to happen. Although the circumstances are different, a similar percentage discount applied to TWTR’s closing price today would imply that shareholders believe the price could be between $58 and $59 per share (7%-8% more than Mr Musk’s current offer price of $54.20/share).
Lastly, keep in mind that Silver Lake and Elliott Partners invested $1 billion in TWTR in May 2020 (see here) to fund stock repurchases, arguably putting a floor under TWTR’s share price at a time when the pandemic was wrecking the price of the company’s shares (mid/high $20s). Therefore, private investment firms – at least these two and probably others – are familiar with TWTR and have come to the company’s rescue before. Operationally, nothing seems to have really worked since this investment, but these firms and perhaps other might remain sympathetic to the company’s plight and could consider investing more to help the company stay independent (unlikely), or to take the company private, or be part of a consortium to do so.
Conclusion
My thoughts, as I said at the onset, are that Twitter will be sold. I see little defence that management can possibly put forward to shareholders that would enhance the stock price to the level that Mr Musk is currently offering. I believe that the poison pill defence is simply a tactic, a way to force Mr Musk or another bidder to pay a higher price for the company. I can hardly see a way that the company’s abysmal stock performance can justify the company remaining independent. Should the company be sold - and I believe it will - the price/share will almost certainly be higher than Mr Musk’s opening offer, more likely in the $58 - $60 per share area. Having said this, will Mr Musk be the buyer? This is far from certain. Will Mr Musk raise his offer to stay in the game and try to achieve the support of the Board? This too remains to be seen. Mr Musk is one of the world’s richest men and most successful entrepreneurs, not to mention a prolific user of Twitter, but whether or not he will sweeten his offer enough to both trump other potentials bidders so as to get the support of the company’s Board remains to be seen.
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