Elon Musk’s 2022 acquisition of Twitter, now rebranded as X, is increasingly being viewed as a disastrous financial move, particularly for the banks that financed the deal. It could become one of the worst leveraged buy-out (LBO) deals for banks since the 2008 financial crisis. Compounding the issue, Musk’s turbulent relationship with advertisers has severely impacted X’s revenue, leading to a sharp decline in the company’s value. As financial pressures mount, concerns are growing that Musk may have to sell a significant portion of his Tesla shares to cover the losses at X, leaving both his companies in a precarious position.
A leveraged buyout is when a company buys another company using borrowed funds rather than its own. For the Twitter deal, Musk contributed over half of the $44 billion purchase price himself, but $13 billion was raised from a group of lenders including Barclays Bank Plc. This was necessary because Musk had sold a significant amount of Tesla stock, which might have otherwise impacted Tesla shareholders negatively.
Twitter deal gone wrong
Normally, investment banks will handle the debt from major deals and then sell this debt to other investors like hedge funds. However, the timing of the Twitter acquisition in October 2022, just as borrowing costs were rising, and the poor financial condition of Twitter, made it hard for banks to find buyers for the debt.
Almost two years later, banks still haven’t been able to offload the debt, which is tying up their resources and limiting their ability to handle new deals. According to PitchBook LCD and reported by the Wall Street Journal, no leveraged buyout debt has lingered on bank balance sheets this long since the collapse of Lehman Brothers in 2008.
Because of the X debt, Barclays’ senior Mergers and Acquisition team saw their annual bonuses slashed by 40% last year, leading to a significant number of resignations among senior staff.
Reports from last October revealed Musk was in ongoing discussions with bankers to restructure the debt for better financial terms. But these negotiations have reached a standstill. It’s unclear if X is currently meeting its debt payments, but at least one bank has indicated the situation is impacting their financial results.
At the time of the deal, Twitter was expected to handle over $1 billion in annual interest payments, not including other expenses. This is a huge burden, considering that its US revenue might only be around $600 million this year – and the company had already struggled to make money before Musk’s takeover.
Last October, X claimed its value was approximately $19 billion, which is about 55% lower than the $44 billion Musk initially paid for the company.
Musk’s relationship with advertisers deepens X’s troubles
The company’s financial woes haven’t been helped by Musk’s strained relationship with advertisers, who are crucial for X’s revenue. A number of high-profile companies suspended advertising over concerns about brand safety and reputational damage after it was alleged their ads were appearing next to pro-Nazi posts, an accusation that Musk refuted.
Apple and Disney also paused advertising after Musk endorsed an antisemitic conspiracy theory on X. According to Pathmatics by Sensor Tower data, of the top 100 US advertisers on Twitter when he bought it in October 2022, around 50 have completely ceased ad spending. Following this exodus, in a widely shared video from the New York Times DealBrook conference last year, Musk told them to “go f—k yourself”.
In a strange plot twist, earlier this month, X filed a lawsuit against a group of advertisers and major companies, including Mars and Unilever. He accuses them of violating antitrust laws by orchestrating an “illegal boycott” of the site that has resulted in significant financial losses for the company.
Musk may still find a solution, but X’s financial difficulties are causing concern among Tesla investors. Recently, Halter Ferguson Financial warned that Musk might need to sell $1-2 billion worth of Tesla shares to cover financial issues at X.
The final irony: Musk’s financial predicament
As the fallout from Musk’s Twitter acquisition continues to unfold nearly two years on, it’s hard not to sense a certain irony in the situation. What was once touted as a bold move to revolutionise social media has instead turned into a cautionary tale of overreach and miscalculation. Banks are stuck with toxic debt, advertisers are fleeing in droves, and Musk, who once seemed invincible, is now grappling with the very real possibility of having to liquidate his Tesla shares to salvage the wreckage of X. For those who watched with scepticism as Musk charged ahead, there’s a bitter satisfaction in seeing the chaos that his impulsiveness and mismanagement has wrought. The once-vaunted tech “genius” now faces the consequences of his hubris, and the financial world is watching with a mix of disbelief and, for some of us, a wry smile.
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