If Musk Buys Twitter, Can He Fix the Business?

Private equity joins the party... 'Love Me Tender'... Musk files Plan B with the SEC... Pay the board $0... Is Twitter's business inherently broken?... A war of soundbites... The evil retweet button... 'IRL'... If Musk buys Twitter, can he fix the business?...

On Monday, I (Dan Ferris) discussed Elon Musk's bid to acquire Twitter...

Among other things, I said the Tesla (TSLA) founder's desire to get other shareholders involved in his offer would attract other bidders.

Right on cue, other bidders for Twitter (TWTR) began to appear...

Two private-equity firms, Apollo Global Management and Thoma Bravo, have expressed interest in acquiring Twitter, according to recent press stories.

The Wall Street Journal reported on Tuesday that Apollo is discussing a bid for Twitter, possibly with Musk or another firm like Thoma Bravo...Reuters reported the same day that Thoma Bravo has told Twitter that it's exploring the idea of making a bid for the company.

This is normal, especially when it's clear that neither the target company nor the market likes the initial bid... and when the business is widely considered to be a highly desirable one with untapped potential.

But as I pointed out last week, when Musk was asked if there was a "Plan B" if Twitter's board rejected his offer, he replied... "There is."

Now we learn that Musk is considering a tender offer. He put down the groundwork for this on Wednesday – April 20... 4/20. The number "420" is a marijuana reference that Musk likes to put into financial transactions.

Last Saturday, two days after he offered to buy Twitter for $54.20 per share, Musk tweeted...

'Love Me Tender,' the title of a 1956 Elvis Presley song...

Then, on Tuesday, April 19, Musk tweeted, "_______ is the night." He used seven underscore characters, prompting some to speculate that the missing word is "tonight." Well, that night came and went without any further announcements... Not "tonight."

The obvious choice is tender, as in Tender Is the Night, an F. Scott Fitzgerald novel... With these two tweets, Musk hinted that he'll make a tender offer for Twitter shares.

Musk made his intentions clear Wednesday morning, when he filed an updated Schedule 13-D form with the U.S. Securities and Exchange Commission ("SEC"). The filing indicates that Musk is considering whether to make a tender offer for all the outstanding shares at his original bid price of $54.20... This is the "Plan B" Musk mentioned last week.

What's a tender offer?

It's when an investor makes a direct offer to buy stock from the company's shareholders.

In most cases, the tender-offer price is well above the current market price... Since Twitter's share price is still in the mid-$40s, Musk's original $54.20 offer might be a sufficiently large premium to entice shareholders to sell.

In a tender offer, Musk could structure it so that he wouldn't have to buy the stock unless a certain number of shares were tendered... With the tender offer, Musk effectively bypasses the board of directors and makes his offer straight to shareholders.

For a tender offer to work in Musk's favor, a sufficient number of shareholders will have to accept his offer and sell him their shares, likely by a specific date... If too few shares are tendered by the offer's expiration date, Musk wouldn't have to buy any of them.

Ideally, Musk would acquire at least a 51% stake, which would give him a majority of the shareholder vote. He owns 9.2% of Twitter now... so he'd need to buy another 41.8% of the shares. A tender offer at $54.20 per share would cost Musk about $17.7 billion to build his stake to 51%.

But Musk is going for it all, not just 51%... Wednesday's SEC filing provides the details for how he would raise $46.5 billion in debt and equity financing... That's more than enough to finance Musk's $54.20 offer for all remaining shares.

The SEC filing says that, as of Wednesday (4/20 again!), a group of financial institutions led by Morgan Stanley (MS) has committed to making $25.5 billion in loans. It also indicates that Musk intends to provide $21 billion in equity financing by borrowing against his Tesla shares.

I wonder why Musk didn't make the tender offer first...

Maybe he did it to show the shareholders that the board is not on their side, which the board did when it rejected his offer. That'll make it a lot easier for him to do what he suggested he'd do in a recent tweet...

Musk wants to reduce the board of directors' compensation to zero, he tweeted on April 18...

Board salary will be $0 if my bid succeeds, so that's ~$3M/year saved right there

That would likely cause many if not all the board members to resign, which would require Musk to get shareholder approval for new board members, who would be more supportive of his plans... Twitter founder, former CEO, and board member Jack Dorsey would likely support Musk's desire to replace the board.

Dorsey tweeted about Twitter's board of directors on April 17...

it's consistently been the dysfunction of the company

At the Bitcoin 2021 conference in Miami, Dorsey was teased about being the "king of censorship," due to the platform's squashing of ideas that its employees don't like, which have often been conservative ideas that did not violate U.S. speech laws.

According to Bloomberg Businessweek, Dorsey "replied earnestly. He said he hoped to remove the 'corporate-ness' from Twitter, making it more open and decentralized, like Bitcoin." That sounds a lot like Musk's desire for Twitter to conform to U.S. speech laws, which would allow a greater diversity of viewpoints than the company currently allows.

Dorsey's term on the board expires on the date of Twitter's annual meeting on May 25. If Musk is counting on Dorsey's support, time is of the essence.

The drama is unfolding in a rather typical fashion... hostile takeover bid, board rejects it and enacts poison pill, tender offer waiting in the wings...

So maybe my original idea was correct and it's still likely that Twitter will be acquired. But there's something about Twitter I just have to get off my chest...

What if Twitter's business is inherently broken?

Remember, Musk said, "this is not a way to make money" about his Twitter offer... He also said he didn't care about the economics of the business. His main goal really does appear to be striking a blow for free speech.

Maybe we should listen to him.

Anyway, I have an idea that might explain why Twitter's business has been unable to perform as well as other social media sites like Facebook and Instagram... both owned by Meta Platforms (FB).

The big problem with Twitter, as anyone will tell you, is that it has a lot of trouble making money off its 217 million daily active users ("DAU"). As I'll show you in a minute, its revenue per DAU has fallen since 2018, while Facebook's has risen 67%.

What if the fact that Twitter is having trouble getting more revenue out of its users stems from the way the Twitter user experience is structured?

In short, maybe Twitter users buy less stuff from advertisers because they are more interested in arguing than in buying stuff from advertisers.

Marketers use emotions to craft ads that get consumers to click through and buy. But what if the emotions that must be tapped into to make a sale are no match for the much stronger emotions that come into play when folks are mad about some political or social issue?

Which thought process of a hypothetical Twitter user do you find more plausible?

"I have to temporarily stop telling the whole world how much I hate Donald Trump or Joe Biden so I can buy a pair of socks!"

or...

"I don't care about socks nearly as much as I want everyone to know that I hate [insert almost anything or anyone here]."

The justification might be one's right to speak freely, but that's not the reason they want to speak with such vitriol on Twitter. The reason is pure, primitive emotion.

Twitter isn't designed so you can keep up with your family and friends as you do on Facebook. On Facebook, you have "Friends." On Twitter you have "Followers."

Nor is it designed to publish images as Instagram, TikTok, and even Pinterest are... making them ideal marketing and advertising platforms.

I don't mean to say other social media platforms are all unicorns and rainbows... Anybody who has used them knows that's not true.

While Twitter accommodates images, it's designed for broadcasting text messages of up to 280 characters per tweet.

Twitter is ideally suited for waging a modern soundbite war...

You don't go there to look at ads...

You go there to tell all your enemies how stupid they are and to stand up for what's right. You're mad as hell and you're not going to take it anymore... And you're certainly not going to stop to buy socks along the way.

I realize this might sound too cynical, so let me show you a bit of the two news articles that got me thinking this way earlier this week...

The first was a 2019 New York Times interview with former Walt Disney (DIS) CEO Bob Iger. He was at the helm in 2016, when Disney considered acquiring Twitter. Iger ultimately backed away, telling the Times...

The nastiness [on Twitter] is extraordinary. I like looking at my Twitter newsfeed because I want to follow 15, 20 different subjects. Then you turn and look at your notifications and you're immediately saying, "why am I doing this? Why do I endure this pain?" Like a lot of these platforms, they have the ability to do a lot of good in our world. They also have an ability to do a lot of bad. I didn't want to take that on.

If you've been on Twitter, you know condescending snark and derision are the norm. It feels a lot more like it's designed to split us apart than bring us together. And maybe that's its inherent flaw...

The second article I read recently was a long but interesting piece in The Atlantic. It said social media, far from bringing people together, has split the world into a multitude of increasingly hostile and polarized factions. The author, Jonathan Haidt, made the case that this fragmentation is inherent in the structure of sites like Twitter...

One of the engineers at Twitter who had worked on the "Retweet" button later revealed that he regretted his contribution because it had made Twitter a nastier place. As he watched Twitter mobs forming through the use of the new tool, he thought to himself... "We might have just handed a 4-year-old a loaded weapon."

The retweet button probably just seems like a fun idea. It probably never occurred to you that it was contributing to the downfall of Western civilization.

The Atlantic article cited 2010 as the year social media started getting really nasty. Twitter went public in 2013, Facebook in 2012...

So let's compare these two leading social media platforms from a business point of view...

Due to differences in how each company reports results, we have to start with 2018. By then, the trends The Atlantic describes would have been firmly in place, and the difference in results between the two platforms should be clear. And it is...

Check out this chart...

Twitter's DAU grew dramatically faster than Facebook's. Yet Facebook's revenue grew dramatically faster than Twitter's... And the only negative number on the chart is the change in Twitter's revenue per DAU, which fell during the period.

Facebook users have time to click on ads...

Twitter users do not...

And that is its inherent flaw... For it to increase its active users, it needs to continue to be a place where fissiparous chatter is easy to publish in 280-character bits. Easily accommodating a "commercial break" would calm nerves... and who wants calm nerves when you're trying to eviscerate an opponent?

I doubt many will agree with me here...

They'll say, "No, no, no, Dan. Dorsey and Musk are right. It's the board's fault. Once Musk takes control and prioritizes freedom of speech, the business will have a shot at the kind of revenue-per-DAU growth Facebook has seen. It's all about the board."

Believe me, I realize how overblown this all seems... And it's likely that none of this matters to investors who just want to get a fair price for their Twitter shares and move on.

As I've said before, I feel like it's my job to show you a viewpoint you're not seeing elsewhere. Big surprises in markets are more frequent than most people are prepared to handle... That's why I like to entertain scenarios that would surprise a lot of people.

Most people think social media platforms are similar enough that a laggard like Twitter is just one good idea or one corporate takeover from performing more in line with peers... That's normal thinking.

It is less normal to take a step back, assume there's some feature of Twitter's business that limits its revenue potential, and ask what it might be.

But like I said, my philosophical angst might be a moot point for current shareholders...

Musk's tender offer might work...

Or maybe Thoma Bravo and other private-equity firms will get together and make an offer.

I still think it'll work out well for current shareholders. But considering this flaw I have described, I'll be much more surprised if Musk acquires Twitter, makes the changes he wants, and Twitter becomes a more profitable business.

I'm rooting for free speech and for him, but I have my doubts.

Finally, a personal note...

I have to admit my viewpoint on Twitter's inherent problem is likely influenced by a personal issue. I can't seem to stay away from it... even though I'd really like to spend less time there. It has become a huge distraction, and I've become a much more emotional user.

I went there to follow great investors and have wound up spending way too much time getting way too worked up about my political views. I've found many kindred spirits on Twitter... and have taken to responding directly to tweets by folks like President Joe Biden and others I'd likely never have the chance to confront in real life (or "IRL" on social media).

If what I read, tweet, retweet, and like on Twitter isn't real life, then what is it, and why is it so addictive?

Ah, but maybe the question answers itself.

Two 'Holidays' You Might Have Missed

In this new episode of Making Money With Matt McCall, Matt dives into the cannabis and psychedelic sectors. He also talks about earnings. Two big reports came out this week that sent two highly followed stocks in different directions.

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 4/21/22): General Mills (GIS), Kinder Morgan (KMI), Coca-Cola (KO), McCormick (MKC), Altria (MO), Nucor (NUE), and Walmart (WMT).

Another great mailbag today... Our colleague Jeff Havenstein answers a question about the options trading of his friend "Brad," which Jeff wrote about in yesterday's Digest... we have some thoughts about streaming giant Netflix's (NFLX) struggles... and more feedback on the trouble on American railroads... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Jeff, It sounds as if your buddy Brad was not selling covered calls, but cash-secured puts; you mentioned selling options on stocks we would like to own anyway, implying that the stock was not actually owned yet. You also asked Brad if he would one day like to own [the stock], to which he said 'no' again implying puts not calls... did I miss something?" – Paid-up subscriber Jan W.

Jeff Havenstein comment: Jan, thanks for the question.

Selling a covered call and a cash-secured put are essentially the same trade. With a covered call, you own shares of the underlying stock upfront. With a cash-secured put, you deposit the full amount required to purchase the underlying stock in the event your put is exercised. With both trades, you're putting up roughly the same amount of money.

My buddy Brad was selling covered calls. He bought shares of AMC Entertainment (AMC) then sold a call against those shares.

But this is more the point that might have confused you...

My question to Brad was whether or not he wanted to be a long-term shareholder in AMC… or if he just wanted to be in and out of the trade. His response was that he had no intention of being an AMC shareholder for long. Even he agreed it could end up being worth $0. All he wanted to do was take the premium, sell his shares, and run.

Of course, it's not that easy... That's why, like I mentioned yesterday, you should only sell covered calls on stocks you would love to own for a long time.

Selling covered calls is an amazing income-collecting strategy. If things work out, your calls are exercised, and you sell your shares at expiration for a profit. It's easy to earn annualized gains of 20% or higher by selling covered calls. But there's also an outcome where you end up holding the stock with no active options at expiration.

If you only sell options on stocks you want to hold for the long term, you can't lose. In fact, you'll get a better entry price on the stock after a covered call trade than if you just bought shares in the open market (because of the premium you collect).

With a stock as volatile as AMC – which could ultimately go to zero or it could explode 200% in a few weeks – I'd rather own the stock without selling options so I can also reap the benefits of unlimited upside. But in truth, I'd rather play blackjack than gamble on AMC shares.

Again, there's a right way to use options and a wrong way.

If anyone has any interest in learning the right way to use options, one that has produced a 94% win rate over a decade-plus, as I mentioned yesterday, my boss and mentor Dr. David "Doc" Eifrig recently went on camera to explain all the details…

Click here to listen to what he has to say.

"Reduction of Content (Marvel to Disney, The Office to Peacock) + Increase in Subscription Fee + Increase in number of Streaming Services = Loss of Subscribers.

"Does Netflix CEO Reed Hastings not understand basic math. Why would subscribers increase by 2.5 million? How does that math work?

"I really think common sense is becoming the rarest commodity of all." – Paid-up subscriber Mark T.

"In response to Mark W. comment on Union Pacific [in Wednesday's Digest]. I work in the Trona Patch in southwest Wyoming, which produces soda ash. It is used in many products including baking soda, powdered detergent, and glass. The largest percentage of soda ash is used in the production of glass, from windows to bottles.

"Two weeks ago Union Pacific said they were limiting the amount of rail cars that they usually handle. This will impact the bottom line for these mines. Hopefully it does not result in layoffs, we'll see. This will impact many industries and lives. Hopefully our government takes the blinders off before it's too late. Not holding my breath!" – Paid-up subscriber Michael W.

"Regarding the April 21issue of the Digest [in the mailbag], the discussion about UP limiting the shipment of product from companies to relieve congestion was quite interesting to say the least. Disgusting and alarming are better descriptions.

"These people sure can spin a yarn when they want to and the rest of us are left to deal with whatever line they are shoveling. While I am sure the supply chain disruptions, the congestion at our West Coast ports, etc., makes life more difficult for planners and dispatchers, I also believe that those running UP are not beyond taking advantage at a crucial time to raise rates.

"As was stated this is a critical time for farmers, the food industry and the nation as a whole. Wheat and corn don't grow in December and January. Nor do most other food products that require fertilization. Farmers can't just wait till UP decides to allow it to be available. And what about urea in diesel? If that diesel can't be produced there isn't any to put in the semis hauling goods across the country. Then where are we? At the mercy of the railroads once again.

"Their excuse was lack of locomotives. How laughable. I live in Wyoming very near the BNSF lines that run through here. Just east of us near a little town called Rozet, Wyoming are parked several hundred locomotives. They have been there since well before the pandemic began. [The] war on coal shut down a large amount of production from our mines and those locomotives have been sitting there ever since...

"Something stinks here and it isn't the feedlots across the nation!" – Paid-up subscriber Terry B.

Good investing,

Dan Ferris
Eagle Point, Oregon
April 22, 2022