Musk’s Latest Twitter Move May Not Be as Crazy as It Seems
What would business journalists do without Elon Musk? It’s a Friday, after all, when business news tends to be scarce. So we appreciate Musk’s decision to liven up our day with his early morning tweets, declaring the Twitter acquisition to be “on hold” and then proclaiming his continued commitment to it. What’s going on? The simplest explanation is probably correct: Musk wants to cut the price, having realized he is massively overpaying. And he wouldn’t be wrong in thinking that.
Before Musk disclosed his Twitter stake in early April, Twitter shares were trading—as they had for a couple of years on average—at roughly half the forward sales multiple of Snap, a social media company of comparable size, according to Koyfin data. But in recent weeks, as Snap stock fell with the market while Twitter did not, the multiple on the two stocks has converged to the point where they’re nearly equal. Twitter stock would have to be trading around $24 to restore that historical relationship, which it would be if Musk walked away. If Musk were making his offer today, he might pay only around $28, including a premium. In other words, his original $54.20 price is nearly 50% too high.
Of course, the Twitter board has no reason to agree to a price reduction. Obviously, Musk should have anticipated how the market would move when he made his offer. As we pointed out on April 25, the day his bid became public, he was taking a big risk in buying Twitter at that moment. Then (as now) we looked to be on the verge of a recession. (CEO Parag Agrawal confirmed the parlous state of the ad industry with his cost-cutting moves this week, which he elaborated on publicly today.) And while the market has deteriorated in the last few weeks, conditions were volatile when the deal was done. Musk can’t credibly claim things have changed meaningfully since then. Even if they had, Twitter’s business isn’t in such bad shape that the board would need to sell at a fire-sale price in the middle of a major market meltdown.
All of that suggests Musk will either have to live with the existing deal, or walk away and accept the consequences. He can afford to handle those consequences. After all, Musk is a little like Donald Trump: He acts like the usual rules don’t apply to him and manages to get away with figurative murder. The real pity, if the deal collapses, is that Twitter could use the fresh ideas and energy Musk would have brought to the company. Someone, somewhere will probably end up buying out Twitter—if not Musk, maybe a private equity firm that sees the potential to cut enough costs to boost the company’s profits. The only question is who and at what price.