This deal is very Musk: Revisiting the Twitter acquisition

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This article is from WeChat public account: Economic Observer (ID: eeo-com-cn) , author: Miao Yinzhi (Professor of Central University of Finance and Economics), and the header image comes from: Visual China

Musk, the owner of a series of star companies such as Tesla, Space X rockets, and Starlink, began to increase his holdings of “US Weibo” Twitter in March, and announced in mid-April that he planned to acquire all the shares of Twitter in order to unlock (unlock) ) the extraordinary potential of Twitter. This was first seen as a joke, and then it looked like it was going to become a big battle. As a result, the Twitter board quickly surrendered. Within two weeks, Musk’s “special military operation” won a big victory, but it is currently blocked. It can be described as twists and turns.

The behavior of Twitter management in recent years has long been criticized. In addition to the tendency to control content, it is also more embarrassed than other rival platforms such as Facebook’s business model vitality. In the first quarter of this year, it lost 128 million US dollars. If the free-growing “Iron Man” can complete the acquisition, it will have a profound impact on the Internet industry, speech environment and even the political climate in the United States. I won’t expand on it here. This article mainly focuses on the commercial law perspective of the offensive and defensive battle of acquiring listed companies, and focuses on Musk’s ideas. Distinctive features, to be restored.

1. Hostile Takeover and Hostile Takeover

First, an often misunderstood topic needs to be revisited. The United States and the United Kingdom are rare countries in the world with decentralized shareholdings, so it is easy for one person or a group of people to buy into the major shareholders of public companies with publicly traded shares. For example, Musk has become the largest shareholder with a 9.2% stake in Twitter.

Shareholders have the right to elect replacement directors. Compared with countries with concentrated ownership, which mainly rely on long-standing major shareholders to supervise directors, the United States is characterized by using the external environment of the so-called “control market of listed companies” to restrain directors. The logic is very simple. Someone can buy the status and control of the major shareholder, which means that your stock price is not high; if the stock price is not high, it means that the directors and executives are not operating well, or that the new major shareholder believes that the company’s share price still has room for potential appreciation. So, you are still ineffective.

Such unsolicited new major shareholders rely on their own capital rather than the invitation of the other party’s board of directors to enter the door. After entering the board, they are likely to “one dynasty and one courtier” and clean up the original board of directors. In other words, this is a hostile takeover . But that’s not necessarily bad for the company. People may feel that they are value discoverers, so there is no “maliciousness”. In English, “hostile takeover” is generally not used. This term is actually a “malicious” translation of “hostile takeover”.

Although a hostile takeover may drastically change the company’s original operating policies, including selling assets and laying off workers. This is often used by the original board team to prove the malice of the “barbarians at the door”. However, everyone comes to the company to make money. As the saying goes: there is no such thing as a quiet time, but someone is carrying the load for you. The continuation of inefficient projects that have been cut in the past is itself based on the “internal injury” suffered by shareholders and investors.

Of course, Musk’s hostile takeover may not be all about the money. As we all know, Musk, who is worth more than $200 billion, is a sentimental party. He is dissatisfied with the social effects of Twitter’s business model. There’s nothing wrong with this hybrid motive.

Because on the one hand, he did not advocate paying a penny less because he had feelings, or asking others to pay a penny more for his feelings. Like all pure commercial investors, he asked if the other investor would accept it voluntarily. On the other hand, in recent years, the white-left political atmosphere in the United States has deeply penetrated into the business circle. A typical manifestation is that corporate governance has begun to advocate ignorant ESG (environmental, social and governance) considerations.

Simply put, it is the belief that the company should consider any other factors other than earning money in earnest. Since company directors and executives can justly not make money for all kinds of ESG reasons they like, Musk, as a boy who was determined to “save mankind” when he was a teenager, can of course be a little bit more than he can make a foolish bid. Your own mind, not a “head full of money”.

2. Hostile takeover and goodwill takeover

Twitter’s directors are naturally good people, and they will not wait to die. Before Musk’s showdown, on April 5, Twitter CEO (CEO) Agrawai publicly invited him to join the board, saying “Welcome to Musk” like the owner.

This may be to turn a potential enemy into an ally, or it may be a lesson learned while watching “The Godfather”: “Be closer to your friends, and closer to your enemies.” On April 10, the Indian-born CEO said it was about “collaboration and de-risking”. If Musk said yes, his previous takeover raid turned into a goodwill takeover that coexisted peacefully with Twitter’s current board.

Musk also wanted to join at one point, but later decided to decline, according to Twitter management. Twitter CEO embarrassedly said “I believe this is for the best (this is for the best) “, and emphasized that although shareholders’ opinions will be listened to, the company’s goals and priorities remain unchanged, “How we decide and execute is up to us. hand, not anyone else”, “Let the noise go away”.

Previously, when the CEO invited Musk to join the board, he said he would ” appoint ” him as a director. This may be in the CEO’s mindset, but it’s actually a somewhat unusual expression.

According to the company law, shareholders elect directors, the board of directors appoints management, and shareholders and directors are supposed to be the bosses of executives. However, due to the widespread dispersion of shareholdings, the corporate governance model in the United States is centered on the board of directors, and the actual power is in the hands of the management with the CEO as the core.

According to the so-called “dog wagging tail becomes tail wagging dog” in American slang, the executives who are also directors in the United States often have an octave louder voice in the board of directors (the same is true in China) . The process of confirming nominations is like a rubber stamping process.

But this approach is wrong. Therefore, the United States pushes the independent director system to counter the influence of management on the board of directors. In the market, the “shareholder activism” of institutional investors such as funds to counteract the board of directors dominated by insiders through mechanisms such as soliciting voting rights has also been widely praised by the academic community.

Under US law, generally, only when a vacancy on the board occurs (such as a director’s death, resignation, or failure to perform) , the board can elect and appoint a director by majority vote to fill it. The current public information is unclear about Twitter’s arrangements at the time. Although the power of the largest shareholder holding 9.2% of the shares is incomparable to that of the shareholders holding 51% of the shares, when the Twitter CEO said that he “appointed” the largest shareholder as a director, the senior worker seemed to have a rubber stamp in his heart. Programs are saved. It’s also possible that Musk was more upset by seeing the CEO’s posture.

3. Multiple bid acquisitions and one bid acquisition

Musk’s $54.2 per share offer is a one-off, a 54% premium over his previous purchase of Twitter and a 38% premium over the previous day, which he said was “the best and final” Quote.

In order to control costs, traditional hostile acquirers often offer existing shareholders a reserved price, which is higher than the company’s existing stock price, but lower than the final psychological price. In this way, on the one hand, it can reduce the pressure of early fund raising; on the other hand, if there are bidders or encounter fierce resistance, there is room for them to raise the price and increase the temptation; Province.

Musk, who does not take the usual path, has too many things to worry about. He didn’t plan to spend time on Twitter, so he directly showed his trump card. This is a bold psychological warfare, but not reckless. Because there are so many famous names on Twitter, bosses who are generally afraid of trouble will not come to bid. Twitter’s other major shareholders will also not be competing.

Another major shareholder of Twitter, Vanguard Fund, increased its stake to 10.3% after Musk’s offer, but the characteristics of securities funds are that they will diversify investment and will not seek control. Another major shareholder of Twitter is Saudi Royal Holding Company, although they have objected, saying Twitter is worth more than $54.20 a share.

But the market is about real money and real silver and votes with your feet. If the stock price can’t go up, but it still has potential, it’s just a bargaining talk. In addition, such Middle Eastern state-owned enterprises can’t “go as you please.” If they want to buy “American Weibo”, they will definitely attract more opposition than Musk.

Therefore, the one-time offer is very straight and not too oppressive. It is not as torturous as the “first-stage limited-time high-price acquisition, second-stage low-price closing” transaction that was popular in the United States in the early years.

Of course, in order to protect investors, even the richest man can’t just report a number in empty words, especially since Musk made an oolong in 2018 claiming to buy Tesla and delist it. His takeover offer is legally called an offer, which is known as an offer in the workplace, and has the effect of one-way binding on the issuer. At the same time, the bidder also needs to explain its own relevant plans, including how many shares it intends to buy, and the validity period of the offer. Among them, the most important is the financing plan to convince everyone that he is not here to play. After all, for the richest man, an offer of $44 billion is also hundreds of “small goals”.

In this regard, Musk’s funding plan is as high as $46.5 billion, including: 1. Debt Commitment Letter (DCL) provided by Morgan Stanley and others $13 billion, including $7 billion in syndicated loans, guaranteed and unsecured bridge loans $3 billion each (these bridge loans are really high-yield junk bonds) ; 2. Morgan Stanley and others provide $12.5 billion in margin loans; 3. Musk’s own equity financing commitment letter (ECL) 21 billion Dollar.

4. Intermediary acquisitions and solo acquisitions

Investment banks are a class of high-end, high-end institutions that are familiar to the public. Its main business is the issuance of securities and the advising and financing of acquisitions. These two types of activities also intersect, such as issuing securities to raise capital and then implementing acquisitions. Investment banks are the mainstream institutions on Wall Street in the United States, and they are also the almost necessary main body of various large-scale acquisitions. They are as dazzling as king makers.

But Musk, who has 90 million Twitter followers and a public relations team all by himself, seems to have changed his game. In addition to a small number of necessary professional assistants to help file securities regulatory disclosure documents, Musk’s acquisition is more personal hero.

He did not follow the traditional routine of inviting a bunch of men and women in suits from investment banks to secretly discuss plans and make PPT presentations. Some traditional partners also looked a little confused when he pushed hard on Twitter. In contrast, Musk named the acquisition entity set up as X holding company, and the project code was set to X, which are not important slots.

Musk’s fanatical operation was once regarded as a joke by insiders. But just like Trump’s campaign road, he did it according to the rules of law, then the world changed, and the world view of many people changed. Just like many traditional Republican politicians who have been condescending to Trump, the investment banking giants who have been neglected earlier will naturally actively seek cooperation when they see Musk’s momentum. This further strengthened Musk’s confidence in playing cards.

V. Attempts and Failures of Anti-takeover

American boards have many powers. When others make a takeover offer, the board of directors can and should make a recommendation to the majority of shareholders. The board also has certain powers to expressly object to particular acquisitions.

The powerful anti-takeover weapon “poison pill” has already been set up in Twitter’s articles of association. There are several generations of poison pills, with varying levels of legality. The most common form is that the articles of association provide that if the company encounters a hostile takeover, such as a threshold of more than 15% of the shares, it can automatically allow cheap issuance of shares to other shareholders. , to dilute the acquirer’s shares. Its specific jurisprudence and tricks are more complicated, and to put it simply, it is a rogue means used to hinder hostile acquirers.

Control of the “switching” poison pill is usually held by the board of directors. The board can use it to bargain with the acquirer. If this can help shareholders get a higher bid, it can be regarded as a shareholder protection mechanism, otherwise it is just a director protection measure.

If the Twitter board of directors did not admit its counsel this time, the countermeasures that the overbearing president Ma could take would be more complicated, including calling on the majority of shareholders to unite and remove relevant directors through the solicitation of voting rights in the election of the company’s board of directors due in May. Change people to solve the problem.

Conversely, like any battle, a takeover depends on both the defender’s weapons and the defender’s willpower. Musk’s success in the business world shines brightly. And he is not a pure commercial war this time. On the one hand, this top public opinion leader holds high the banner of American core values ​​such as freedom of speech and the cornerstone of democracy. On March 25, he launched an online poll on Twitter on whether to adhere to freedom of speech (more than 1.4 million people). Voting “no”, accounting for about 70%, and then this voting activity was deleted by Twitter) ; on the other hand, after Musk announced that he would take over the board of directors, he would drastically reduce the remuneration of directors, which also added a moral color to his attack.

Musk is not a “vegetarian”, and no supervisory department leader called him a “harm.” It’s not surprising that traditional elites on Twitter’s board of directors have no heart for this digital-age “Mars barbarian.” The current CEO only took up his current position last year. This is just a stop in his mobile working career. Unlike some old managers who regard the company’s career as a lifelong effort and affection, they will choose to resist to the death.

What’s more, the core directors and executives of Twitter have the protection of “golden parachutes”. That is, according to the previous agreement with the company, if the company’s control changes and they are swept out of the house, they can take away millions or even tens of millions of dollars in compensation. This is also a bad habit in the corporate governance model dominated by American management, as if these losers really have zero capital beyond their ability.

6. Completion of the contract and pending delivery

Musk’s acquisition of Twitter is believed to have particular personal business interests. Bloomberg columnist Levine believes that an important dimension of Musk’s business success in recent years is the accumulation of popularity through Twitter, which has not only boosted Tesla’s stock price, but also provided the possibility of raising funds directly from the public in the future. The Twitter account is one of Musk’s personal assets.

However, on the one hand, Twitter management allows the leaders of anti-American entities in the Middle East to open accounts, on the other hand, the emphasis on security anxiety and the large number of bans are not in line with white-left politically correct Americans. As a new energy giant, Musk was originally more in line with the interests of the US Democratic Party’s policies, but now he has been deleted by Twitter more and more frequently. He has drawn pictures to show that he believes that his political stance has not changed and that he is still left-leaning, but the increasingly left-shifting political spectrum since the Obama era has made him “right-wing”. But the difference is that this richest victim has the ability to change the situation of “I am fish and meat”.

However, the transaction is not legally closed until final closing . A number of factors also mean that Musk will not necessarily complete the delivery.

After Musk and Twitter announced a deal on April 25, Tesla’s stock price plummeted 12% to $876 on the 26th, and Musk’s one-day book loss of personal wealth was worth half of Twitter’s purchase price. On May 19, Tesla’s stock price had fallen to $700. Because Musk is borrowing a margin loan, if the market value of the Tesla stock used to guarantee falls to a certain level, he is obliged as a borrower to provide more collateral, otherwise the financial institution that lends the funds will not continue this project. borrowing.

Buyers are bearish, which is the norm in mature markets in the United States, because shareholders of the buy-side company will worry that management is too expensive to buy. Unlike in China, where acquisitions can be speculated as good news, and acquisitions can be speculated as good news, stock traders can win twice. Although the main body of this acquisition of Twitter is not directly Tesla, it does have stakes. One is that Musk will sell some Tesla shares to raise capital, and the other is that Musk’s energy may be scattered to the more flamboyant Twitter operation, which is not good news for Tesla.

Some people are already worried that Musk will one day think that “selling specials and buying pushes” is not cost-effective, and he will withdraw from the case. This reckless approach is not only a bit of Musk, but also has hidden secrets in the acquisition agreement.

Market watchers have already pointed out that the buyer’s breakup fee agreed in the deal is lower than the norm. The so-called breakup fee refers to the cost of the party that decides to withdraw after the large-scale merger enters the substantive negotiation stage to compensate the other party for the “torsion” cost or loss of opportunity.

Generally, the break-up fee promised by the buyer is higher than the break-up fee promised by the seller. This is because U.S. law requires the seller’s board of directors to try their best to strive for a favorable solution for shareholders, and promises too high a break-up fee, which is like a promise of “you won’t marry”, which is not in line with the board’s duty of loyalty and diligence to shareholders. When the buyer actively pursues it, it is also natural to promise a higher breakup fee.

According to the data revealed by M&A expert Zhang Weihua, from 2016 to 2020, the agreed break-up fee for large-scale M&A transactions in the United States is generally 3%-4% of the M&A amount, or even as high as 20% (Google acquired Motorola) .

But Musk’s breakup fee for the $44 billion deal this time was only $1 billion, or 2.27% of the purchase price. This may be because he has always been ruthless. After all, the breakup fee he paid to his first ex-wife and the mother of five children was only a mere $2 million, but it also objectively reduced the cost for Musk to finally withdraw from the transaction.

Shares in Twitter have fallen from $52 to $37 (May 19) since the Musk-Twitter deal, lower than before Musk disclosed his 9% stake in Twitter. In addition to the weakness of Twitter’s own operations, this also shows that market investors are bearish about the transaction and do not intend to hold shares and wait to cash in at $54.2.

Tesla’s stock price, which was the consideration for payment, fell sharply, as did the proposed purchase of Twitter’s stock price, but the payment price was fixed, which would really make Musk uncomfortable. He tweeted on May 17 that at least 20% of the accounts on Twitter were fake and said his offer was based on the accuracy of Twitter’s disclosure documents. If Twitter’s management can’t prove that the number of fake accounts is less than 5%, Twitter is not worth the price, and “the transaction can’t go forward.”

Although the Twitter CEO said that the account authenticity estimate was based on non-public information and was inconvenient to disclose, Musk did not accept the account. Since he did not ask for Twitter’s non-public information when he signed the merger agreement, he now turned to the United States. SEC, calling for an investigation.

For now, the possibility of a deal falling through has reached a new high. However, this round of acquisitions by Musk is enough to leave a strong mark in business history, or “one push”.

This article is from WeChat public account: Economic Observer (ID: eeo-com-cn) , author: Miao Yinzhi (Professor of Central University of Finance and Economics)

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