Why did Elon Musk buy Twitter? David Olive writes:
Some business deals eventually go bad. And some are failures from the start.
Elon Musk’s planned $44-billion (U.S.) purchase of social media company Twitter Inc. announced this week falls into the second camp.
Seldom has someone tried to pay so much money for something of so little value.
When you look under the hood, Twitter looks like a lemon:
In 2016, Walt Disney Co., Salesforce Inc. and Alphabet Inc. each scrapped plans to buy Twitter after finding a lack of economic value in the company.
As a business, Twitter barely registers with its $5 billion in 2021 revenues, against the $118 billion in revenues posted by Meta Platforms Inc., owner of Facebook, Instagram and WhatsApp.
In its 15 years, Twitter has never been able to settle on a business model that generates sustainable profit growth.
Musk’s Twitter purchase is one of the biggest leveraged buyouts (LBO) in corporate history. In an LBO, the target company is loaded up with debt to finance its own acquisition.
To finance this deal, Musk has put up $21 billion of his own money. Another $12.5 billion is covered by bank loans secured by $62.5 billion worth of Musk’s shares in Tesla.
The remainder, about $13 billion, is debt that will be piled onto Twitter’s balance sheet.
Those numbers add up to more than $44 billion to cover the lenders’ fees.
Twitter’s new debt will stick it with annual debt-payment costs of about $1 billion.
With projected cash flow of only $1.9 billion next year, Twitter won’t have much free cash flow to finance a needed turnaround.
Musk is the richest man in the world. He knows how to make money. But this purchase doesn't fit the profile.
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Image: The Toronto Star
