It’s shaping up to be a weird, broken version of a leveraged buy-out.
The usual Mob bust-out LBO formula as practised by vulture capitalists like Mitt Romney works something like this:
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Private equity firm does research to identify distressed public company with a known brand but a rock-bottom share price and little fundamental value left.
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PE firm buys company at a fire-sale price using a combination of its own money and short-term loans from 3rd-party investment banks and funds.
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PE firm takes company private, immediately loads it up with debt they don’t plan on paying off and strips any assets that still have value.
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PE firm uses the money realised themselves to quickly pay off the 3rd-party loans (with a small amount of profit for the lenders) and – more importantly – to pay themselves back with a large amount of profit.
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PE firm either offloads the husk of the company on suckers (sometimes by taking it public again, always by hyping non-existent value) or just lets it die on its own. The firm made its profit so it doesn’t care.
There are several things that make this situation different.
A. Twitter was acquired under duress, due to a lack of research and sloppy due diligence on the deal by the impulsive Musk. Until last week he was desperately trying to get out of the deal through the courts and the press. His pretense now that he wanted it all along isn’t convincing.
B. Twitter stock was acquired by Musk at a premium. Whatever the real fundamentals and distorted P/E, the market did not see Twitter as a distressed company or a cheap buy. That also means that for Musk the third-party lenders (including and greedy thuggish ones like Prince Bonesaw’s family) were not just nice-to-have wants but desperate needs, since he couldn’t cover it all on his own.
C. There’s not much to be stripped in terms of assets at Twitter (the brand isn’t going anywhere, the dwindling userbase can’t be sold. Maybe some of the patents.). Musk also can’t load the company up with debt because other potential lenders will know it’s a risky bet despite his hype and his “visionary” reputation. That’s why he’s now trying to (illegally) claw back money from the execs and employees and why he’s trying to impose new fee structures.
D. Due to A, B and C, Musk’s third-party lenders likely didn’t expect to be paid back according to the normal vulture capitalist model above. His fanbois may have fronted him the money with no strings attached, but not these sharks. My guess is that they made him pony up his TSLA stock and perhaps also his equity in SpaceX as collateral. Depending on the terms, they’ll give him 9-12 months to flail about and the Saudis and others will take advantage of the situation to censor criticism, but in the end they know that he’s going to fail. When he does they’ll take control of Tesla and SpaceX and leave him controlling the remains of Twitter along with stuff they don’t want like Neuralink and The Boring Company.
