Dear Reader,
One of the most baffling things that I have found in all of the excitement and interest around Elon Musk’s acquisition of Twitter has been the skepticism around whether or not Musk has the wherewithal to get the deal done.
I’m not referring to the sheer fortitude required to get the deal done or to turn the company around. I’m not talking about whether or not Musk has the time to devote to the deal and to provide leadership and oversight to implement his vision for Twitter.
The “wherewithal” I’m referring to is about the money… the dollars… the greenbacks.
Incredibly, much of the mainstream financial media, business journalists, and market commentators have echoed a stream of trite doubt. This is despite the fact that Musk is worth roughly a quarter of a trillion dollars on any given day.
It seems quite obvious to me that someone with that amount of assets would have no problem paying for the acquisition. As I wrote previously, a personal balance sheet like Musk’s will have no problem raising capital to affect the deal.
Most of the doubters tend to get hung up on things like “his assets aren’t liquid” or “he’d be forced to sell too much of Tesla, which would tank the stock.” I’m just paraphrasing, but that’s the gist of the negativity.
Which is why this is a great case study in how financing gets done in a deal like this. Now that a couple of days have passed, we have a better understanding of how Musk put together the cash necessary to buy out Twitter lock, stock, and barrel.
Musk’s Money
Source: The Wall Street Journal
Aside from Musk’s own $21 billion cash contribution, more than half of the deal is financed from other sources. He was able to corral $13 billion of loans from major banks like Morgan Stanley, Barclays, Bank of America, and Japan-based Mitsubishi UFJ Financial Group (MUFG).
The other $12.5 billion contribution also comes from a string of major banks willing to loan on margin against Musk’s Tesla stock. He is able to use one of his assets – Tesla stock – as collateral against the loan.
And that’s how Musk got it done. $44 billion for Twitter, plus an additional $2.5 billion for transaction fees.
We might be surprised to see so many lenders involved in the deal, but it actually makes a lot of sense. These banks were most likely willing to lend even more than they did.
Musk was able to spread around the access to his deal. All of the banks were lining up to support Musk.
Why? The answer is pretty simple.
If they help out Musk with the acquisition of Twitter, they have a better shot at gaining access to the next round of financing at SpaceX, The Boring Company, Neuralink, future financing for Tesla, or Musk’s next revolutionary tech venture.
If they lend now, at least they have an established relationship, an “in,” for consideration for the next hotly contested financing. If you’re not on the above list, good luck.
And this is beside the fact that Twitter, with the right changes, is worth more than $100 billion. If Musk decides to sell two or three years down the road, he’ll most likely make two or three times his money.
The banks are supporting a deal that is taking place at such an undervalued level that there is, in reality, very little risk. They’ll make a great return through interest payments on their loans and get their original capital back.
And Musk will make $50–$100 billion on a turnaround. While the investment return probably won’t put a smile on his face, what he will have done for society most certainly will.