Elon Musk & Twitter are Getting Back Together

Would you consider sending and receiving money on Twitter?

Since I last wrote to you about the Twitter-Elon Musk saga, the Twitter deal has gone from being done to undone to redone. Now, Elon is talking about turning Twitter into an everything app like China's WeChat.

If you weren't following the development of the Twitter deal over the last 5 months, here's a brief rundown of how we got to where we are now.

Less than 2 weeks after I wrote to you about the Twitter-Elon Musk saga, on May 13th Elon Musk tweeted that the Twitter deal was put on hold pending details supporting the calculation of fake Twitter accounts.

The tweet that launched a thousand ships.

3 days later, on Monday the 16th of May, Twitter CEO Parag tweeted a thread explaining that accurately measuring spam accounts was complicated or, as Elon would put it, "the Twitter bot problem is as unknowable as the human soul".

The next day, Elon threatened he wouldn't proceed with the deal if Twitter could not prove that bots make up fewer than 5% of users. This exchange caused Twitter's share price to drop almost 10% from Friday's closing price to around $36 on Monday and Tuesday because it signalled that the deal might not close or if the deal closed, it would be at a lower price.

People saw this exchange as either a negotiation tactic Musk wanted to use to get a better deal or buyer's remorse so he could get out of the deal.

But therein lies the problem. The deal included a $1 billion breakup fee if one party decided to walk away. Even if the deal fell apart because Elon could not secure the financing to get it done, he would still have to pay the breakup fee.

The deal also included a specific performance provision that allows Twitter to force Elon to do the deal at the agreed price.

While all of this was going on, Elon didn't officially back out of the deal till almost 2 months after the exchange in July. In his regulatory filing, he said the company made misleading representations over the number of spam/bots on the service and had not complied with his request for information on the same. Thus, he wanted to cancel the deal as this constituted a material breach of the contract.

A few days later, Twitter sued Elon to force him to complete the deal.

"Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away" - Twitter said in the suit

On September 29th, something really interesting happened

The floodgates opened, and in about 40 pages of text messages, we saw texts between Elon and Twitter executives, friends, celebrities, potential investors and Silicon Valley juggernauts showing in part how the deal came together behind the scenes.

Among several other things, in the texts, Jack Dorsey (co-founder and former CEO of Twitter) said he tried to get Elon on the board in the past but was blocked and later referred to the board as terrible. The texts also revealed that some of Elon's ideas in the Twitter deal were originally from Jack Dorsey.

"Twitter started as a protocol. It should have never been a company. That was the original sin" - Jack Dorsey

To be fair, an expert rightly said that "the thing about texts and emails is that people can say things impulsively that are sloppy and not carefully worded". So, while these texts would have been read in court with utmost seriousness, I doubt that while the exchange happened, the participants were being as literal.

5 days after the texts became public, Elon revived the deal at the original price.

In a show of happiness, Musk tweeted

"Buying Twitter is an accelerant to creating X, the everything app"

3 important issues that currently have people talking

1. Did Elon say he's going ahead with the deal to stall the court case?
2. Will the financing for the Twitter deal still come through?
3. If all goes well, will "X", the everything app, be successful?

Let's break down each issue

Is this a stalling tactic?

There's no way to know for sure. But it does look suspicious that Elon announced that he would go ahead with the deal "bots or no bots" 5 days after private texts were released when he had been sparring on the bots issue for 3 months.

However, it makes sense if Elon thinks he will lose the case and be forced to complete the deal. If he loses, he would have to pay his and Twitter's legal fees in addition to the $44 billion for the deal, a double loss. So if he felt he had a high chance of losing the case, it makes sense to cut his losses now and go ahead with the deal.

Whatever the case, the judge presiding over the case said

"the case is stayed until 5pm on Oct. 28, 2022, to permit the parties to close on the transaction. If the transaction does not close by 5pm on Oct. 28, 2022, the parties are instructed to contact me by email that evening to obtain November 2022 trial dates" - Kathaleen McCormick, Chancellor of Delaware's Court of Chancery

So Elon has a ticking clock; if the deal does not close by then, the court case is back on. This brings us to point 2.

Will the financing for the deal still come through?

It has been widely reported that several large US and international banks could lose $500m or more if they proceed with obligations to fund the Twitter takeover.

How?

6 months ago, Morgan Stanley and six other banks, including Barclays and?Bank of America, committed to raise $13bn in debt to finance the Twitter purchase. When Elon made the offer, the US 10-year Treasury yield stood at 2.83%; now, the yield is 3.70%.

A simple rule of thumb to understand bonds is bond prices fall when yields and interest rates rise.

Usually, banks would sell bonds and loans to fund deals like these. The bonds that the banks would have sold to fund the Twitter deal have fallen in value. Also, investors are less eager to buy bonds now than they were toward the beginning of the year, so selling debt to fund the deal will be hard, and they could lose money in the process.?

According to Bloomberg's?calculations, the banks could collectively lose $500m or more if the debt were sold now. Alternatively, the banks can just cough up the money themselves without selling bonds, but doing so could strain their earnings and capital requirements.

In light of this, it seems likely that some banks might be looking for ways to get out of the deal, which could put the financing for the deal at risk.

Twitter said it’s suspicious of Elon's promises to close on the transaction because a banker involved in the debt financing testified on Thursday that Musk had yet to send them a borrowing notice and had otherwise not communicated to them that he intended to close the deal, which lends to the 1st point of this being a stalling tactic.

However, an industry expert has said that borrowing notices usually come toward the end of closing on a purchase, so it may not be an issue.

Will "X", the everything app, be successful?

Elon seeks to recreate China's WeChat, which has the functionality for shopping, payments, subscriptions, messaging and entertainment on one platform. Last quarter alone, WeChat generated $5.9bn in revenue, 5 times Twitter's revenue. So if Elon successfully makes X, it could be a huge financial turnaround story for Twitter. However, there are a few hurdles in the way of that.

WeChat has over 1.3 billion monthly users. Twitter has 238 million monetisable daily active users. So Twitter will need more users.

To be fair, of WeChat's 1.3 billion monthly users, more than 1 billion are located in?China. Twitter is a global company; if it can get a larger share of the 6 billion people outside of China, it could increase its monthly users to match WeChat.

However, even if Elon can pull more users,?the circumstances that allowed WeChat to grow are almost impossible to replicate for a US company.

Using one app to access other services via mini-apps makes sense in China. Google Playstore is not available in China, and Apple has a different version of the App Store for iPhone users in China.

Users in China don't have access to as many apps via app stores as the US has with Playstore and App store. So to make "X", Twitter would need to build partnerships with companies like Uber, Airbnb, Amazon etc., and add them to Twitter. But these companies already have standalone apps and may not welcome Twitter acting as gatekeeper.

Let's not even begin to talk of the regulatory troubles Twitter will face from the US Federal Trade Commission (FTC).

Plus, WhatsApp has more potential to be a super app than Twitter. Meta has 2 billion WhatsApp users Vs WeChat’s 1.3 billion. But if they tried to build it, the regulatory hurdles they'll face in Europe and the US would make it almost impossible.

Also, to the question at the start of this article. Would you consider sending and receiving money on Twitter? For X to work, people have to be confident and comfortable with the idea of transacting business on Twitter. Can X earn that trust?

As you can see, there are many hurdles in Twitter's way to making it into X. Can Elon surmount these hurdles? Only time will tell.

Final Thoughts

When Elon said he would go ahead with the deal, Twitter's stock price soared to $52. Since then, the price has come down to $49.20. This means traders are pricing in a chance that the deal may not close or that the deal might have to be done at a lower price because Elon may not be able to get all the debt financing he secured at the time he made the offer.

On the flip side, Tesla's share price is down over 12% this week because Elon may have to sell more Tesla stock to cover the funding gap created by some debt financiers pulling out and to fund his part of the deal.

Will the deal be completed, and will X be successful? Your guess is as good as mine. But we should get more clarity on the 1st question by November. What do you think is going to happen next? Comment below.