Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Musk's Twitter Bid Turned It Into A 'Trading Sardine'; Is It Good For The Company?

By Andy HechtStock MarketsApr 26, 2022 06:15AM ET
www.investing.com/analysis/musks-twitter-bid-turned-it-into-a-trading-sardine-is-it-good-for-the-company-200622858
Musk's Twitter Bid Turned It Into A 'Trading Sardine'; Is It Good For The Company?
By Andy Hecht   |  Apr 26, 2022 06:15AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This article was written exclusively for Investing.com

  • Elon Musk's attractive bid for TWTR
  • Feels he can unleash the social media platform’s potential
  • Poison pill from TWTR bought time
  • Musk gets what he wants
  • Building an empire

There is an old joke in trading circles about trading sardines. When sardines disappeared from the waters of Monterey, California, commodity traders bid up the prices of cans of sardines to lofty levels. One day, a buyer decided to treat himself to an expensive and rare meal, opening a can and consuming the contents. He immediately became sick and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines; they are trading sardines.”

The story embodies the notion that asset prices can deviate from underlying fundamentals. We have witnessed examples of company shares that became trading sardines over the past years. The most recent have been GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), where a pack of traders and investors on social media websites have run in pools of capital holding risk positions in the stocks, pushing the prices to incredible highs, despite weak earnings and individual fundamentals.

Elon Musk’s bid for Twitter (NYSE:TWTR), along with the company’s initial response of a poison pill before ultimately approving the deal just yesterday, are likely to turn TWTR shares into the latest trading sardine, where the stock’s price will experience increased volatility, while the company’s fundamentals become a sideshow.

Elon Musk's Attractive Bid For TWTR

Elon Musk, the notorious CEO of Tesla (NASDAQ:TSLA) who is also the founder of SpaceX, the Boring Company and other ventures, and the world’s wealthiest person, offered to buy Twitter, the leading social media company, for $54.20 per share; the deal secured yesterday is for $44 billion in cash. Musk plans to take the company private.

Twitter Daily Chart.
Twitter Daily Chart.

Source: Barchart

The chart shows that TWTR shares were below $40 per share before Musk announced his $54.20 bid. He had already accumulated around 9% of the company’s shares, before his stake was announced; after it went public chatter that he would take a seat on the board emerged though he said at the time he'd keep his ownership below the 15% level.

However, when the board position fell apart, and discussions over his plans for the company did not agree with those of sitting board members, he decided to buy the company outright and take control away from the current board of directors.

Feels He Can Unleash The Social Media Platform’s Potential

Musk has been a constant presence on Twitter. And lately, he has been using the platform to outline his plans for the company. On April 19, he tweeted:

Earlier this month, on April 9, he asked:

Is Twitter dying?

Before his bid, Musk revealed his issues with the company, tweeting:

Given that Twitter serves as the de facto public square, failing to adhere to free speech principles fundamentally undermines democracy.”

Last week, Tesla’s first-quarter 2022 earnings blew the cover off the ball as the company reported EPS of $3.22 versus analyst expectations for $2.26. Total revenue came in at $18.76 billion versus an expected $17.80 billion.

Musk’s success as a CEO has made him the world’s wealthiest person, yet, at least initially, the Twitter board wanted no part of him owning the company.

Poison Pill From TWTR Bought Some Time

The Twitter board and many high-ranking employees operate as if Twitter is their company. However, it's the shareholders who actually own the social media platform. To challenge Musk, the board made decisions on behalf of shareholders to block the plan to take the company private.

Musk used Twitter to ask followers:

Taking Twitter private at $54.20 should be up to the shareholders, not the board.”

The response was 83.5% yes and 16.5% no, showing overwhelming support for his bid for the company. Founder and former CEO Jack Dorsey accused the Twitter board of “dysfunction.” Dorsey is a current Twitter board member.

To challenge Musk’s bid for the company, the board of directors adopted a “poison pill”—a ploy that allows existing shareholders the right to purchase additional shares at a discount, diluting ownership interest of any new, hostile stakeholder—meant to limit Musk’s ability to increase his stake in the company. Notwithstanding, the board eventually approved Musk's bid. The transaction is now subject to shareholder vote, after which it's expected there will be no regulatory hurdles to clear.

Musk’s move, to take Twitter private, appears to transcend a profit motive. His ideological objection to the social media platform seems to be the reason for the proposed acquisition.

As of the end of last week, Musk’s net worth was around $265 billion, so profit is secondary or not even in the equation. Indeed, still, on April 18, to provoke the board even further, Musk tweeted:

Board salary will be $0 if my bid succeeds, so that’s $3 million/year saved right there.”

Each Twitter board member receives $250,000 to $300,000 in annual compensation.

Musk Gets What He Wants

Musk is a character. He has smoked pot on a podcast with Joe Rogan, challenged U.S. regulators, built businesses that are technological masterpieces, created jobs and wealth, taken on U.S. Senators, and now has become the owner of Twitter.

He's a prolific user of the social media platform with more than 82 million followers. To fund his TWTR bid, he has secured $46.5 billion in financing and is raising another $12.5 billion for the offer via a margin loan secured against his TSLA shares. Morgan Stanley is leading a group of financial institutions providing $13 billion in debt financing.

On Monday, April 25, TWTR shares were trading at $51.70 per share. The board approved the purchase before the market closed.

Regulators will have to approve the deal, which could take some time, though no delays are expected. Still, Musk is not one of the SEC’s favorite moguls. Nevertheless, there is little standing in the way of approval for the world’s wealthiest person to own the global “town square,” as he calls Twitter.

The other investors alongside Musk will want to see a return and are betting on him to make the company another jewel in his growing empire.

Building An Empire

At a recent TED Talk, Musk said he had a “Plan B” if TWTR’s board rejected his offer, and the “poison pill” set the stage for a battle. One potential Plan B strategy would be to team up with three other Musk-friendly investors, each buying 15% of the company to oust the board of directors with a change of majority control of the company. Once he secured financing and no other buyers stepped forward, the board had no choice but to accept the juicy offer.

The bottom line is Musk was on an ideological quest for Twitter, and he emerged a winner. He now has a host of options as his empire grows to include the world’s premier social media platform.

He could fix Twitter’s economic model and take the company public in a few years. He can fold it into a mega-company, including SpaceX, the Boring Company and even Tesla. Whatever Musk ultimately decides, some Twitter-related parties are already on board.

After news of the deal broke, Jack Dorsey, co-founder of Twitter and its former CEO tweeted, also referencing current TWTR CEO Parag Agrawal:

Dorsey followed that by saying:

I’m so happy Twitter will continue to serve the public conversation. Around the world, and into the stars!

Once again, the market learned a lesson with the Twitter acquisition—it is not a good idea to bet against Elon Musk.

Musk's Twitter Bid Turned It Into A 'Trading Sardine'; Is It Good For The Company?
 

Related Articles

Musk's Twitter Bid Turned It Into A 'Trading Sardine'; Is It Good For The Company?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (6)
GFlen BC
GFlen BC Jun 02, 2022 4:15AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Agree wigh Douglad H. This A Hecht gets paid to write what ghe masters dictates. Doesn’t matter if you get sick sfter reading
Norman Shapiro
Norman Shapiro Apr 26, 2022 1:09PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Great review of the situation - and great trading joke from the old days of Phibro (a"h)!
Douglas Heffron
Douglas Heffron Apr 26, 2022 12:12PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
In Andy's defense...they get paid to write...so he has to constantly produce articles...enough if it's awful.
AYDIN ÇAĞLAN
AYDIN ÇAĞLAN Apr 26, 2022 12:08PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
It is non of your business
Fozzy Ferdinand
Fozzinand Apr 26, 2022 8:50AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
What do fundamentals have to do with anything. He's buying the company. You will no longer have shares in Twitter. The price is set. Anything below $54.20 is a buy, anything over is a sell, until the deal closes. This is a nonsense article.
patricio Silva
patricio Silva Apr 26, 2022 7:27AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
who will be 1st twtt from mars !
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email