By Ryan C. Smith
Special to The Examiner
As the dust begins to settle from Elon Musk’s acquisition of Twitter, many questions are surfacing about how the world’s richest man — worth an estimated $239 billion after purchasing Twitter — secured the $46.5 billion in funding needed for the $35 billion buyout of the social media giant.
What makes these questions pressing is Musk’s reputation for unpredictable behavior. It’s a reputation that’s fully sealed, thanks to brushes with the Securities & Exchange Commission for tweets that were seen as stock manipulation, concerns from Tesla investors that his new acquisition will distract him from running the company and a tweet from Wednesday proposing to buy Coca-Cola, estimated to be worth $265 billion. “Next I’m buying Coke to put the cocaine back in,” Musk wrote on his favored social media platform.
Meanwhile, an examination of SEC filings related to the Twitter deal shows Musk’s purchase enjoys considerable backing from influential financial figures. This may guarantee the availability of credit for making the purchase, but it also means Musk’s debtors have considerable leverage to protect their interests. How this works is shown in the structure of the loans used to purchase Twitter.
Three different forms of financing were used to acquire Twitter. These were a bridge loan, a margin loan and equity financing. Bridge loans are a form of short-term financing used to cover costs until a company or person receives a more permanent source of capital and are based on the perceived creditworthiness of the borrower. Margin loans, by contrast, are borrowed against the value of an existing asset like shares of stock. This makes them vulnerable to fluctuations in the value of the underlying asset which, if it sinks too low, can trigger a margin call, leading to the loss of the underlying asset. Equity financing, the third and largest component of the deal, is based on the sale of existing assets to cover expected costs.
Of these, the bridge and margin loans both required the backing of outside banks. In the case of the bridge loan, Musk managed to secure up to $6 billion in funding from a loan syndication consisting of Morgan Stanley Senior Funding, Bank of America NA, Barclays Bank PLC, MUFG Bank Ltd., BNP Paribas, Mizuho Bank Ltd. and Societe Generale. The margin loan had an even larger group of interested parties, consisting of all the banks involved in the bridge loan and the further addition of the Credit Suisse Cayman Islands Branch, Citibank, Deutsche Bank, the Royal Bank of Canada and the Canadian Imperial Bank of Commerce.
These banks provided $12.5 billion in financing secured with an estimated $62 billion in Tesla stock. All the participants in both are among the 50 largest banks in the world, and all of the participants in the margin loan would have a claim to a portion of Musk’s Tesla stocks if the loan defaults.
The third source of financing, estimated at $21 billion in SEC filings, was Musk’s equity commitment through the sale of Tesla stock. Musk, at time of writing, has sold an additional $8.5 billion as part of covering this commitment. This sale of an estimated 9.6 million shares coincides with recent drops in the value of Tesla’s stock, which has investor concerned.
Such concerns are likely based on the impact that selling so much stock would have on Tesla’s share price. While the recent drop in Tesla’s price is not the worst this company has seen this year to date, it still represented a loss of $125 billion from the company’s net worth. The precise details of this margin financing are not yet public, making it unclear as to what share price would put this agreement in jeopardy. But if any form of financing falls through, per SEC filings, the deal would then be null and void.
If it does go through, however, Elon Musk will be the most indebted CEO in America. The purchase of Twitter will be going through based on $18.5 billion in debts, putting the ratio of debt to estimated value at approximately 52% of Twitter’s overall value. This could spark concerns for San Francisco that Musk would be forced to engage in asset stripping to pay for these costs, especially if the margin loan fails and Musk is forced to surrender his shares to his creditors.
Then there’s the issue of what will happen to employee stock options. Many tech companies use long-term stock vesting agreements as a tool for retaining talent with the promise of a significantly higher future payday beyond base pay. Audio of a pre-buyout meeting of Twitter executives showed this was a significant concern for both employees and the company’s leadership, with some discussion of the possibility of a direct equity payoff for all currently vested stocks. The same audio also saw the possibility of a “mass exodus” of employees in direct response to the acquisition.
For now, it appears Elon Musk has sufficient resources to pay for his purchase of Twitter. How this purchase will impact his existing properties and Twitter remains to be seen. So only time will tell if the financing arrangements Musk reached will hold firm or whether his acquisition will lead to a loss of vital talent from the San Francisco social media giant.
Ryan C. Smith, Ph.D., is an economics researcher specializing in the international oil industry, global finance, supply chains and the Middle East. He lives in San Francisco.