Finding the Business Case for Musk's Bid​

By Jake Rickman​

What do you need to know this week?

Elon Musk’s $40bn+ bid for Twitter has dominated market news for the past couple of weeks. And for good reason: it is one of the largest proposed buyouts ever.

Elsewhere this week, we explain how Musk intends to structure the takeover. But another important question to ask is why Musk is so intent on buying Twitter — especially considering how much of the funding comes from Musk himself (or loans secured on his shares in Tesla).

Rumours abound as to what he intends to do once (if) the transaction completes. But from a business perspective, is Twitter really worth this much money to Musk (or anyone, for that matter…)?

Why is this important for your interviews?

When it comes to discussing corporate takeovers, it is always helpful to understand the merits of the deal from the various parties involved. After all, if you can explain the business case (or lack thereof) for a corporate takeover to interviewers, you will go a long way in demonstrating your commercial awareness.

The business case for Musk buying Twitter at this amount is hardly made out. Musk is offering Twitter’s shareholders more than the current price of the share ($54 per share versus $40 right before his offer). But his offer is 30% less than its all-time high of more than $70 per share in early 2021, which suggests the market’s keenness may be waning.

Looking at Twitter’s books, it has never consistently turned a profit, despite bringing in over $5bn in revenue throughout 2021. The company posted an operating loss of nearly $500m for 2021, which means all of its revenue (plus some) was spent on running the site, research & development, and sales and marketing.

Musk claims he will “unlock” Twitter’s value, but it is not clear how. Given his stance as a “free speech absolutist”, he may try and remove Twitter’s existing moderation policies (which he loudly criticised several times before). But given that most of Twitter’s revenue comes from advertising, advertisers may shy away from the platform if the ultimate effect of removing the policies is to provide a platform for extreme or hateful ideology.

On the other hand, Twitter is a truly sui generis product — there is nothing else like it. Musk calls it our “de facto town square.” Perhaps he has ideas for innovating the site he has yet to disclose.

For now, the outcome of Musk’s potential investment is anyone’s guess.

How is this topic relevant to law firms?

Twitter’s board owes certain fiduciary duties to the company and its shareholders. When it comes to takeover bids, the board has a legal duty to evaluate the merits of the deal and determine if accepting it would be in the shareholders’ genuine interest. Given the premium and the presumable lack of other offers, the board — with the advice of its legal team (including Skadden) — may have felt obligated to put it to the shareholders to approve.