Elon Musk’s decision to take Twitter off the stock market allows him to make major changes quickly, but it also leaves the company heavily in debt, a risky choice for a money-losing business.
It’s an old strategy with notable successes and failures, from computer maker Dell (a success) to toy stores Toys “R” Us (a failure).
But Twitter is “very different from a traditional acquisition” of a company exiting the market, said Steven Kaplan of the University of Chicago Business School.
Most of these acquisitions are cash-flow positive companies, Kaplan said, but the social network is losing money — as it lost in the first two quarters of 2022.
The equation is further complicated by Elon Musk’s $13 billion in loans, which must be repaid by the San Francisco company, not the entrepreneur.
According to calculations made by AFP, Twitter will have to pay just under $1 billion in interest and principal from the first year, for a group whose turnover in 2021 will reach just $5 billion.
“This debt is difficult when you’re losing money. So there’s going to be a lot of pressure to cut costs and raise revenue so they can pay off the debt,” said Kaplan, the finance professor. Otherwise, Musk will have to find capital to avoid bankruptcy.
The entrepreneur laid off about half of Twitter’s employees on Friday and is looking for new revenue streams, including an optional $8-a-month subscription fee for those who want a verified account.
Further development of Twitter may require an injection of capital, which in theory would be more difficult for a private company to attract.
“I don’t think you can create more debt,” says Eric Gordon, an entrepreneurship expert at the University of Michigan’s Ross School of Business.
– “Radical Changes” –
Another unique element is that most of these deals “start with financial logic or industrial logic,” while Elon Musk “didn’t have one.”
“He was unhappy with Twitter’s treatment of free speech” and decided he could “handle it better,” Gordon said.
As a general rule, exits involve “fundamental changes” in a company, and those changes may not be readily apparent because the company no longer has liabilities, said Sreedhar Bharath, a finance professor at Arizona State University. Communicate publicly.
“The company is immune to the punishment imposed by the financial markets if they don’t like the changes,” he said. “Some might say markets are too focused on the next quarter’s results,” and executives at newly privatized companies can pursue “long-term goals” without worrying about the short-term.
But given Twitter’s high public profile, key decisions are likely to become public, noted Jagadeesh Sivadasan of the University of Michigan’s Ross School of Business. This was evident for post-acquisition decisions to fire key officers.”
A study published in 2019 by two researchers at California State Polytechnic University, which examined nearly 500 deals between 1980 and 2006, found that about 20 percent of large companies that underwent leveraged buyouts failed within 10 years. compared to two percent for a sample of other companies
“Most of them have done better than public companies, but they don’t get a lot of publicity … Big failures get a lot of attention and create the idea that debt is killing the company,” Gordon said.
“Most of the time, it works, and that’s why people keep doing it,” Gordon added.
Kaplan said: “Musk is one of the most creative people on the planet, able to build three completely different companies, PayPal, Tesla and SpaceX, all of which have reached a value of more than 100 billion dollars.”
“He’s a talent magnet … He’s going to attract real talent (to Twitter) that hasn’t been there for a while … I wouldn’t bet against him.”