Elon Musk made Twitter an offer that board members simply couldn’t refuse, Wharton experts said.
The billionaire’s bold move to pay roughly $44 billion in cash for the company and take it private immediately raised the stock price - along with eyebrows. Critics are worried that he will undo content moderation policies and wield too much power over the platform, which has 217 million daily active users. Musk has said he wants to unlock Twitter’s “tremendous potential” to advance free speech.
Wharton marketing professor Pinar Yildirim said the deal makes sense from a business perspective because there are a number of money-making features that Twitter hasn’t implemented over the years, such as the edit button that Musk has clamoured for or creative reels that would make it more competitive with Instagram and TikTok. Even after the departure last fall of co-founder and former CEO Jack Dorsey, the company has remained true to its original mission of public discourse, so it should be easy for Musk to pluck “low-hanging fruits” by adding features that would yield greater profit and please users.
But Yildirim is also concerned about how the deal will affect Twitter’s outsized role in mass communication. It’s a “town square” where ordinary citizens can discuss topics of the day, where companies introduce new products and get consumer feedback, where celebrities talk to their fans, and where public officials talk directly to their constituents.
“We see wars being managed on this platform, so it has tremendous influence,” Yildirim said during an interview with Wharton Business Daily on SiriusXM. “From a second perspective as a scholar, I think this is not just an investment in business. It’s also an investment in managing public discourse or having an influence on public discourse or buying influence. And that second part makes me think a little more, makes me pause.”
The question about content moderation is an important one for Twitter and all social media platforms because they are vulnerable to abuse, Yildirim said. They don’t want to choke free speech with too many prohibitions, yet they realise that controlling misinformation and disinformation is a topline responsibility.
Musk has made it clear that he wants to relax the community standards on Twitter. During the Ted2022 conference last month, he said Twitter should not regulate free speech beyond the laws of the countries it operates in. Yildirim said that strategy would likely spark more user engagement in the short term, but it’s unclear how that would affect Twitter in the long term.
“Would it still maintain this public discourse aspect, or would consumers look for alternate platforms to move to, especially if they feel uncomfortable with this full free speech environment?” she said. “Those are aspects that we are going to watch carefully and see.”
Cash is king
Despite the controversy created by the sale, the deal seemed inevitable. Once Musk, who’s worth an estimated $250 billion, set his sights on the social media network, there was little to stop him, according to Wharton adjunct full professor of finance Kevin Kaiser. In a separate interview with Wharton Business Daily, he explained how even the Business Judgement Rule would not have prevented the buyout.
The Business Judgement Rule is a legal principle that protects company boards from frivolous shareholder lawsuits if they are acting in good faith to protect shareholder value. It allows boards some latitude in rejecting bids they believe are not viable or would cause harm. For example, they could say no if they have evidence that the buyer’s finances will fall through, if a better offer is in the works, or if the board has a strategic plan that would raise the stock price without selling the company.
Twitter’s board had none of those points to fall back on, Kaiser said.
“He made it cash, and that made it very difficult for them to say no,” he said of Musk. “He put a big premium on the share price, he made it cash, and put them in a very difficult spot. And because he’s Elon Musk - the wealthiest individual in the world right now - they couldn’t argue he couldn’t come up with the cash.”
SEC filings reveal that Musk will borrow about $13 billion and spend $21 billion of his own money to buy Twitter. Kaiser said that, according to Forbes, Musk has access to about $3 billion in cash, so he will need to liquidate some of his assets to complete the transaction. He sold $8.5 billion in Tesla stock last week, fueling speculation that he will use that money to pay for the acquisition of Twitter. However, his SEC filings did not disclose the reason for the sales.
In a tweet earlier this month, Musk said, “No further TSLA sales planned after today,” a message that seemed to assure investors after the automaker’s stock price dipped.
Tesla shareholders are “already concerned that he might be becoming distracted from running Tesla with this whole Twitter thing,” Kaiser said. “So, I think he did the right thing in bolstering his position by keeping it all cash.”
The borrowing will result in both Musk and Twitter carrying significant debt, he said. In fact, CNBC reported that Musk would be the “most indebted CEO in America” if the deal is completed. That debt is another reason to watch what happens with Twitter.
Yildirim offered some thoughts on the possible paths Twitter could take as it tries to retain its user base and raise revenue. “If I were to put on a businessperson hat and think about the monetisation strategies, maybe I would care less about creating public discourse but think more about the features that I could integrate,” Yildirim said. “The best Twitter from a business perspective looks very different from the Twitter that’s created for public discourse.”
Knowledge@Wharton is the online research and business analysis journal of the Wharton School of the University of Pennsylvania.
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