Well guys, he actually did it. After weeks of hinting interest in taking a stab at the social media business, Elon Musk decided that it would be easier to simply buy his way through it - and so Twitter’s board of directors agreed to sell their platform for $44 billion. In this article we’re going to walk you through and break down the events leading up to this massive acquisition that’s being both celebrated and decried across the internet.
Changes in Twitter’s management
In late November 2021, Jack Doresy announced he would be stepping down as Twitter CEO as he believes the company is “ready to move on from its founders.” The chief technology officer at the time, Parag Agrawal, served as Doresy’s replacement. At the time, Doresy owned 2.4% of the company, totalling to 18,042,428 million shares. He was still the largest individual shareholder, but investment firms and hedge funds such as The Vanguard Group Inc (who own 10.3%) and BlackRock Inc (who own 6.5%) held more.
Enter Musk
In early April, Musk suddenly purchased a 9.2% stake in Twitter, sending the share price soaring from $39.31 on April 1st to $49.97 on April 4th. Seeing as how this made him the largest individual shareholder, the Twitter board of directors offered him a position alongside them. At first Musk accepted, but Agrawal announced a few days later that the deal was off.
Musk responded by offering to buy the entire company for $54.20 per share. This offer wasn’t exactly taken well by a lot of people, as he now had 2 things to deal with: trouble with the law and a pushback from Twitter.
Here’s some equities law 101 for you: whenever an investor purchases more than a 5% stake in a company, they must disclose this to the Securities and Exchange Commission (SEC, Wall Street’s police) within 10 days of the purchase, as outlined under Sections 13(d) and 13(g) of the Securities Act of 1933. April 4th was when Musk declared his 9.2% ownership in the company, but a New York law firm called Block & Leviton (who acted on behalf of several Twitter shareholders) filed a lawsuit the very next day accusing Musk of actually hitting an ownership over 5% on March 14th, meaning his disclosure should have been no later than March 24th.
The reason such a law exists is essentially to promote fairness in the stock market. 5% equity is generally considered a significant stake in any company, so if an investor suddenly purchases that amount, it essentially lets other shareholders know that something is happening, for either better or worse. This allows everyone to invest with the same information and hence promote equitableness in the stock markets.
But that wasn’t the only thing Musk had to deal with. Companies usually aren’t enthusiastic at the idea of a non-board member holding more shares than their actual board members, but when the situation seems to be coming to that - as was the case with Musk and Twitter - a limited duration shareholder rights plan (aka a “poison pill”) may be adopted.
This is a defensive tactic a board of directors may use in response to an attempted takeover, that is, when someone purchases an entire company. The way it works is that the firm in question will attempt to dilute the buyer’s stake by offering additional shares to other investors at a discount. So when Elon started buying up that 9% stake, Twitter offered a bunch of additional shares to everyone who wasn’t Musk for cheaper, which effectively decreases the value of his stake with each additional share purchased at the discount. Why? Because more shares being issued, in this case at least, makes the existing shares less valuable - higher supply, lower price, ceteris paribus.
Closing the deal
Musk’s initial offer on April 14th was $43 billion: $13 billion of which he’d borrow, $12.5 billion he’d borrow against equity holdings (loans with shares as the collateral, which is basically protection for the lender in case the borrower defaults), and $21 billion he’ll pay directly out of his pocket. Then after the poison pill and lawsuit, Twitter accepted what was called the “best and final offer” of $44 billion on April 25th, with a $1 billion termination fee if Musk doesn’t go through with it.
As part of his financing plan, Musk sold 4.4 million of his Tesla shares this Tuesday and Wednesday, during which the share price plummeted:
He sold another 5.2 million shares on Thursday and tweeted that he wasn’t planning on selling any more of his Tesla stock.
What’s next?
The most official prediction we have is a statement from the man himself:
Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated…I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans.
Despite these specific points Musk highlighted, it’s still unclear as to whether that’s all he has in store for the platform. He has a history of being rather unpredictable (we certainly didn’t see this acquisition coming) which has brought him just as many fans as critics, both in regards specifically to the Twitter buyout and in the big picture.
Econ IRL
Getting a job isn’t the easiest task in the world, but it becomes exponentially more difficult if you have a criminal record and the economic literature clearly demonstrates employers’ reluctance to hire a formerly incarcerated job candidate. In order to counter this phenomenon, several cities and states have adopted “Ban the Box'' policies that either delay or sometimes outright prohibit querying a job applicant’s arrest/conviction record. This week’s paper, however, argues that such laws don’t address the fundamental reasons employers are interested in applicants’ criminal records.
After conducting a field experiment involving nearly a thousand US businesses, the researchers come up with 2 main findings:
How likely a business is to hire a convict depends heavily on that business’s situation. 45% of them are willing to do so for jobs that do not involve customer interactions, 51% for jobs that do not involve high-value inventory, and 68% if they’re are having a hard time filling a job
The incentives of these businesses can be changed by providing safety nets of sorts. The share of businesses willing to hire a convict increases 12% when offered a $5,000 crime and safety insurance, and 2.1% for every 10% increase in an offered wage subsidy (a payment to workers by the state)
‘Till next time,
SoBasically