Elon Musk ditched one of the riskiest components behind his $44 billion Twitter bid, a move you might read as a smart move given that one-way markets have moved over the past few weeks: towards down, down, down.
Musk has dropped plans to take out a margin loan as part of his $54.20 per share takeover financing, according to a new filing with the SEC. It originally intended to use such a $12.5 billion loan, but several weeks ago halved the figure after bringing additional investors into the deal. Now he says he will offset that $6.25 billion in additional equity. This does not affect an additional $13 billion of standard corporate debt involved in the deal.
If Musk had taken out the margin loan, he would have had to secure it with his Tesla stock. Under the terms of the loan, Musk was to put up $31.25 billion worth of Tesla stock. With the stock price falling, he was in the position of needing more Tesla stock to cover the loan. Margin lending is a gamble at the best of times. Even more during a financially difficult period, such as the period we are currently in.
If things got worse, there was the outside possibility that Musk could face a so-called margin call, when the equity backing a margin loan has deteriorated and a lender forces a loan to be repaid. Had that happened, Musk would have had to sell Tesla shares out of the blue, driving the stock price down even further. (The most dramatic margin calls lead to dramatic endings, spirals that have entirely consumed and terminated businesses in the past. happened recently at Archegos Capital Management. It probably wouldn’t have happened to Tesla, but it sure would have made a bad situation worse.) Musk’s lender, Morgan Stanley had set a 40% drop in Tesla stock to trigger such an event. And with Tesla stock already down nearly 25% in the past month, you get an idea of Musk’s situation: dramatically changed from when he first talked about taking over Twitter in April, c is to say.
As with all things Musk and Twitter, there are some complications in this turn of events. First and foremost, where will he get the $6.5 billion in equity to replace margin lending?
He will have to do one of two things. He may sell more Tesla shares, which is not a good scenario in a bear market. This will further depress Tesla stock. Or he’ll have to find more friends to join his merry band, which isn’t a good scenario either. If it was difficult to convince investors a month ago before stocks started to fall – and by the shortage traditional high-level names on the transaction table, it seems like it was hard – it will be even harder to talk about now. In bear markets, investors shun companies like Twitter, which are unprofitable and always something of a business disappointment. They don’t tend to run towards them. Twitter shares closed Thursday at $37.16, well below Musk’s $54.20 bid.
There is not just that ! Imagine you’re going on a fundraising tour right now to buy a company you’ve just spent the past few weeks slandering, accusing it of mishandling basics like spam estimation. It’s like Musk is looking for someone to partner with him in a house that needs fixing after he stood in the street and shouted about how the place had rats and bad wiring. (But don’t worry, I know a good exterminator, he will probably have to inform any new co-investor of this. This house will be great when I’m done. Rightly so, they can watch it quite amusingly then.)
And here’s the other problem: didn’t Musk say everything was on hold on those spam numbers? In a sense, you can see his margin lending decision as a sign that he’s not on hold, and Musk expects to follow through on it. Why ditch the margin loan and file with the SEC if he hasn’t? Ah-ha. Looks like it might take the place after all, even if there are pests.