In the decade since its creation, Twitter has grown significantly as a platform, and it’s now one of the most heavily-used social media websites out there. Indeed, in 2016, it was estimated that 336 million people were actively using Twitter, and the website boasts a market value of over 23 billion U.S. dollars.
When it comes to corporate acquisitions, estimates generally fall short and the outcome can be much higher than expected. This is certainly the case when it comes to 2020’s acquisition of Twitter by tech mogul Elon Musk. Although the initial sum of the sale was reported to have been around $2 billion, further investigations and analysis has revealed that this figure is much higher, close to $21.4 billion.
According to Prof. Robert Mintz, a financial economics professor at the Warwick Business School in the United Kingdom, the reasons for such a vast mark-up in the asking price could include “tax incentives, expense minimizations and the hyper-growth of the technology industry” amongst other factors.
Experts argue that the marketing brand and global presence of Twitter also drove up the sale’s price. Michael Burry, a well-known hedge fund manager, speculates that “Twitter is a company that commands more value than its fundamentals would otherwise suggest”. This seems to be true, evidenced by the 7.51 percent share of Twitter the U.S.-based mutual fund company Vanguard owns.
Financial statements from the company demonstrate that Twitter’s market capitalization grew significantly over the last few years and it is believed that this was the main factor that influenced Musk’s decision to pay significantly more than the online estimates for such a sale. Furthermore, by making a public announcement of such a large sale, Musk was likely hoping to drive up the value of his own company, Tesla, as well as promoting his own highly-publicized presence in the world of social media.
In terms of the sale’s financial implications, the sale of the company which owns Twitter has had both positive and negative impacts. On the one hand, Musk used pockets of his own money in order to cover the expenses of the deal and therefore the financial burden of such an extravagant sale was not passed on to his beneficiaries. On the other hand, some argue that this extremely high figure will likely have deterring effects for business transactions in the future.
Counter Arguments
Some have argued that in terms of long-term investments, the expenditure was not overly excessive. Professor Fred Smith, a specialist in corporate finance and asset pricing at the University of Chicago, suggests that “in a few decades, Twitter will likely double its current value, thus resulting in a benefit to Musk over the long-term.” Smith is not alone in this opinion, positive predictions indicate that the platform will continue to increase in popularity, meaning a greater return on the initial investment.
Furthermore, the deal will be subject to tax deductions related to intangibles associated with the company’s value, meaning that the amount of money that Musk spent will be reduced significantly. This will benefit both Musk and Twitter, allowing the company to use these funds to further its own progress.
Competition
At the time of his decision, Musk wasn’t the only tech mogul looking to take over the social media platform. For example, Jared Leto and Sean Parker, both wealthy tech entrepreneurs, were reported to have had their own bids for the company. This means that Musk faced competition when attempting to purchase the company and the potentially higher asking price could be a result of such a situation.
Likewise, the logistics of the acquisition process could also have influenced the increased figure. A large number of negotiations, contracts and documents were required to complete the process and some of these could have also had an effect on the cost of the company.
Social Impact
It is important to keep in mind that the acquisition of Twitter has not just impacted Musk and his company; it is also going to have a social and global impact. For example, the overall brand of Twitter will be increased due to the resources that are now available to the company. Additionally, the alteration of ownership will likely affect the user experience with Twitter and thus the overall reputation of the site is likely to be affected.
It is also worth noting that some have argued that the acquisition could have a negative financial impact on the corporate world. The large sum of money is seen as an intimidating figure that might scare off some investors who feel as though they can’t compete.
Law Considerations
Moreover, the legality of such a high-flying acquisition must be considered. A major issue that has been raised is the fact that Twitter’s shareholders will likely incur massive losses, with some shareholders reportedly being driven to bankruptcy as a result. It is, therefore, important to remember the potentially negative impacts that such a deal can have in terms of financial losses to certain individuals.
Furthermore, the transfer of ownership involves a complex network of endorsements and guarantees that need to be validated in order for the acquisition to be declared legal. Additionally, some may argue that the overtly large cost of such an acquisition is improper when considering the large pay gap between those involved in the process.
Stock Value
Since the acquisition, the stock value of Twitter has risen significantly. According to financial experts, this is a pleasing result for all shareholders and an indicator of the bright future for the company as it enters a new chapter under Musk’s leadership. Roger Mortimer, Chief Investment Officer at JP Morgan explains that “the long-term value of the company is likely to increase”, largely due to Elon Musk’s networking capabilities and the inflows of capital which Twitter will likely experience.
Even prior to the acquisition, the stock value of the company was steadily increasing. This is a possible explanation for why Musk chose to invest in the company, as he could identify the potentialities in the platform and thus, wished to own and lead such a sought-after venture.
Analysis and Insights
Ultimately, when looking at the figures, Elon Musk clearly overpaid for Twitter. Such a transaction cannot simply be judged through assessments of financial returns; a number of additional factors need to be taken into consideration. These include the competitive environment of the market, the locality and the legality of the transaction.
Ultimately, it is clear that the sale of Twitter was a risky business venture for Elon Musk given that he overpaid to purchase the company. However, he may be given the benefit of the doubt, as in the long-term it is likely that the platform will expand its user base and capital, thus resulting in a successful acquisition for Musk.
