Why Silver Lake and Elliott Are the Wild Cards in the Twitter Takeover Battle
he last time Twitter was under shareholder assault, from activist investor Elliott Management in 2020, Silver Lake CEO Egon Durban called Twitter CEO Jack Dorsey offering to help, according to a person familiar with the situation. Twitter accepted the outreach: Silver Lake invested $1 billion in Twitter and got a board seat, in a move unveiled as part of a broader peace deal in which Elliott also got a board seat.
In other words, Silver Lake was Twitter’s white knight. That was certainly the view of Twitter shareholder Orlando Police Pension Fund, which alleged in a lawsuit filed last year that Twitter did the deal with Silver Lake “to protect themselves from a high-profile proxy contest” with Elliott. Now the question is whether Twitter can find another white knight to defuse its latest crisis by buying out Elon Musk.
THE TAKEAWAY
The last time Twitter experienced a shareholder attack, Silver Lake emerged as a white knight to help. Silver Lake, or another private equity firm, could play the same role again.
Twitter on Friday announced it had adopted a poison pill in response to Musk’s $43 billion takeover offer this week, the first sign that the company plans to fight the bid. The pill stops Musk from raising his stake above 15% without board agreement. That means he can’t make a tender offer to take control. As he hasn’t yet lined up financing for his bid, such an offer probably wasn’t in the cards in the near term anyway.
Twitter still faces the issue of how to respond to his bid. That’s why the option for Twitter to find an investor to buy out Musk looms large. Musk opened the door to that option by indicating in a letter to Twitter chair Bret Taylor, when he announced his bid, that if his offer failed, he would “reconsider” his shareholding. While Twitter might surely welcome his sale, Musk dumping his entire stake would severely depress Twitter’s share price.
Silver Lake is a possible buyer, although its ability to do a deal would be complicated by the fact that its chief, Egon Durban, is on Twitter’s board. Another issue Silver Lake is under a standstill agreement that would prevent its purchase of Musk’s stake. It’s possible, however, that Twitter’s board would renegotiate that deal.
And Silver Lake could be an appealing white knight for Twitter, as it has a reputation for standing by the management of companies, such as Endeavor, in which it is an investor. Whether Silver Lake and Musk could reach a deal on the price may be the big problem.
Alternatively, Twitter may be able to find another private equity firm to jump in, particularly if it can find a way to sweeten the terms as it did with Silver Lake’s investment during the Elliott episode in 2020. Silver Lake bought $1 billion worth of convertible notes issued on terms so generous that it aroused the ire of the Orlando Police Pension Fund, which subsequently sued. The fund described the terms as “unreasonable and below market” in its lawsuit last year.
The investor alleged the convertible notes were issued “at a substantial discount to market prices.” The convertible notes convert into stock at $41.50 a share. That was just $9 a share above where Twitter stock was trading at the time. The investor noted that other convertible notes issued by Twitter in earlier years converted at much higher prices. In September 2014, for instance, Twitter issued notes convertible at $77.64, about 50% higher than the prevailing stock price at the time.
Twitter and Silver Lake declined to comment. Elliott did not respond to requests for comment.
Elliott Threat
If Twitter doesn’t line up a buyer, there is a risk that someone who isn’t friendly will buy Musk’s shares. One possible contender is Elliott itself.
While Elliott struck a peace deal with Twitter in 2020 after Silver Lake entered the picture, agreeing to limits on its share purchases, those restrictions lapsed when Elliott’s representative, Jesse Cohn, left Twitter’s board last year.
Elliott could be motivated to become active again, given that Twitter hasn’t done what it promised at the time of the peace settlement in 2020. In that agreement, Twitter pledged to make changes to corporate governance, including getting rid of its staggered board structure under which roughly a third of the board is up for election every year. That kind of structure makes it difficult for an outsider to take control of the board. A proposal put to shareholders last year to get rid of the structure didn’t get enough votes to pass, although Twitter is trying again this year.
Twitter also said at the time that it hoped to increase its daily active user count by 20% or more “in 2020 and beyond.” While DAUs grew 26% in 2020, they increased only 13% last year.
Twitter also said it wanted to accelerate revenue growth and gain share in the digital ad market. Revenue growth accelerated right after the pandemic but has slowed down in the past two quarters. Its first-quarter revenue growth is expected to slow again, to 18%, according to data from S&P Global Market Intelligence. As for its share of the ad market, that hasn’t grown in recent years, according to eMarketer.
Twitter hasn’t even completed a $2 billion share buyback program announced at the time of the peace deal: It bought back just $1.2 billion worth of stock through the end of 2021. Twitter recently announced a new $4 billion buyback program.
Moreover, Twitter’s introduction of a poison pill is precisely the kind of defensive measure activists dislike, because they insulate boards from outside pressure.