Musk’s Twitter Bid Turned It Into A ‘Trading Sardine’; Is It Good For The Company?

04/26/2022

5 minutes read

2022.04.26 13:31

Elon Musk’s attractive bid for TWTR
Feels he can unleash the social media platform’s potential
Poison pill from TWTR bought time
Musk gets what he wants
Building an empire

There is an old joke in trading circles about trading sardines. When sardines disappeared from the waters of Monterey, California, commodity traders bid up the prices of cans of sardines to lofty levels. One day, a buyer decided to treat himself to an expensive and rare meal, opening a can and consuming the contents. He immediately became sick and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines; they are trading sardines.”

The story embodies the notion that asset prices can deviate from underlying fundamentals. We have witnessed examples of company shares that became trading sardines over the past years. The most recent have been GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), where a pack of traders and investors on social media websites have run in pools of capital holding risk positions in the stocks, pushing the prices to incredible highs, despite weak earnings and individual fundamentals.

Elon Musk’s bid for Twitter (NYSE:TWTR), along with the company’s initial response of a poison pill before ultimately approving the deal just yesterday, are likely to turn TWTR shares into the latest trading sardine, where the stock’s price will experience increased volatility, while the company’s fundamentals become a sideshow.

Elon Musk’s Attractive Bid For TWTR

Elon Musk, the notorious CEO of Tesla (NASDAQ:TSLA) who is also the founder of SpaceX, the Boring Company and other ventures, and the world’s wealthiest person, offered to buy Twitter, the leading social media company, for $54.20 per share; the deal secured yesterday is for $44 billion in cash. Musk plans to take the company private.

Musk's Twitter Bid Turned It Into A 'Trading Sardine'; Is It Good For The Company? Twitter Daily Chart.

The chart shows that TWTR shares were below $40 per share before Musk announced his $54.20 bid. He had already accumulated around 9% of the company’s shares, before his stake was announced; after it went public chatter that he would take a seat on the board emerged though he said at the time he’d keep his ownership below the 15% level.

However, when the board position fell apart, and discussions over his plans for the company did not agree with those of sitting board members, he decided to buy the company outright and take control away from the current board of directors.

Feels He Can Unleash The Social Media Platform’s Potential

Musk has been a constant presence on Twitter. And lately, he has been using the platform to outline his plans for the company. On April 19, he tweeted:

Earlier this month, on April 9, he asked:

“”

Before his bid, Musk revealed his issues with the company, tweeting:

“.”

Last week, Tesla’s first-quarter 2022 earnings blew the cover off the ball as the company reported EPS of $3.22 versus analyst expectations for $2.26. Total revenue came in at $18.76 billion versus an expected $17.80 billion.

Musk’s success as a CEO has made him the world’s wealthiest person, yet, at least initially, the Twitter board wanted no part of him owning the company.

Poison Pill From TWTR Bought Some Time

The Twitter board and many high-ranking employees operate as if Twitter is company. However, it’s the shareholders who actually own the social media platform. To challenge Musk, the board made decisions on behalf of shareholders to block the plan to take the company private.

Musk used Twitter to ask followers:

“.”

The response was 83.5% yes and 16.5% no, showing overwhelming support for his bid for the company. Founder and former CEO Jack Dorsey accused the Twitter board of “.” Dorsey is a current Twitter board member.

To challenge Musk’s bid for the company, the board of directors adopted a “poison pill”—a ploy that allows existing shareholders the right to purchase additional shares at a discount, diluting ownership interest of any new, hostile stakeholder—meant to limit Musk’s ability to increase his stake in the company. Notwithstanding, the board eventually approved Musk’s bid. The transaction is now subject to shareholder vote, after which it’s expected there will be no regulatory hurdles to clear.

Musk’s move, to take Twitter private, appears to transcend a profit motive. His ideological objection to the social media platform seems to be the reason for the proposed acquisition.

As of the end of last week, Musk’s net worth was around $265 billion, so profit is secondary or not even in the equation. Indeed, still, on April 18, to provoke the board even further, Musk tweeted:

“.”

Each Twitter board member receives $250,000 to $300,000 in annual compensation.

Musk Gets What He Wants

Musk is a character. He has smoked pot on a podcast with Joe Rogan, challenged U.S. regulators, built businesses that are technological masterpieces, created jobs and wealth, taken on U.S. Senators, and now has become the owner of Twitter.

He’s a prolific user of the social media platform with more than 82 million followers. To fund his TWTR bid, he has secured $46.5 billion in financing and is raising another $12.5 billion for the offer via a margin loan secured against his TSLA shares. Morgan Stanley is leading a group of financial institutions providing $13 billion in debt financing.

On Monday, April 25, TWTR shares were trading at $51.70 per share. The board approved the purchase before the market closed.

Regulators will have to approve the deal, which could take some time, though no delays are expected. Still, Musk is not one of the SEC’s favorite moguls. Nevertheless, there is little standing in the way of approval for the world’s wealthiest person to own the global “town square,” as he calls Twitter.

The other investors alongside Musk will want to see a return and are betting on him to make the company another jewel in his growing empire.

Building An Empire

At a recent TED Talk, Musk said he had a “Plan B” if TWTR’s board rejected his offer, and the “poison pill” set the stage for a battle. One potential Plan B strategy would be to team up with three other Musk-friendly investors, each buying 15% of the company to oust the board of directors with a change of majority control of the company. Once he secured financing and no other buyers stepped forward, the board had no choice but to accept the juicy offer.

The bottom line is Musk was on an ideological quest for Twitter, and he emerged a winner. He now has a host of options as his empire grows to include the world’s premier social media platform.

He could fix Twitter’s economic model and take the company public in a few years. He can fold it into a mega-company, including SpaceX, the Boring Company and even Tesla. Whatever Musk ultimately decides, some Twitter-related parties are already on board.

After news of the deal broke, Jack Dorsey, co-founder of Twitter and its former CEO tweeted, also referencing current TWTR CEO Parag Agrawal:

Dorsey followed that by saying: