A board adopting a poison pill to thwart a hostile bid, and unanimously approving a hostile bid are two contrasting ends in the spectrum of possible responses. But the same board doing both to the same hostile bid, and that too within a few days, is nothing but a comedy of errors.
The Twitter board’s abject surrender to Elon Musk’s takeover offer reveals how ensuring shareholders’ short-term interest has overruled long-term responsibilities to other stakeholders – employees, customers and society in general.
Shareholder pressure
According to Wall Street analysts, the U-turn had its basis in the board coming to terms with the fact that the underlying financial performance of Twitter remained weak, and with the company scheduled to report results on Thursday, the stock was getting set for a beating in the absence of a deal. With investors already reeling under massive losses post the rout in shares of Facebook, Netflix, and with multitude of other tech bellwethers in bear market territory, their tolerance for loosing money in Twitter was low.
In this backdrop, Musk’s offer price appeared appealing, although it may have not done justice to the underlying value in one of the worlds’ most-popular and actively used social-media platforms. To unleash the underlying value on its own would have required enduring short-term pain, and showing a lot of patience as turnarounds are at least multi-quarter projects if not years.
The company had just embarked on the process of turn around after Parag Agarwal took over as CEO five months back. At that time, Twitter stock’s initial reaction to news of Jack Dorsey stepping down as CEO of the company, was to move up by 11 per cent! However subsequent market turmoil and weaker December quarter results from the company pressurised the stock. While Musk’s offer price is just around the same price that the shares had reached on news of Jack Dorsey’s exit, it seems more palatable now to investors after enduring declines in recent months, and facing losses in portfolio from other top holdings. Further the fact that Musk was offering to buy Twitter at 7 times one year forward revenue and 27 times EBITDA, which is a premium to Facebook at 3.3 times revenue and 7.3 times EBITDA made the bid acceptable to some. That Twitter’s intrinsic value could be much higher and there was scope to substantially improve monetization did not matter now.
Thus, while the board’s initial adoption of a poison pill reflected confidence in the underlying value of Twitter, the subsequent U-turn and unanimous approval of the offer reflects meek surrender to shareholder preference. In a different time period, maybe like few years back, the board may have been able quickly scout for much better offers from the big techs. But with lot of investigation in recent years in US and Europe into their alleged anti-competitive practices, the board may not have wanted to take a risk as doubts on regulatory approval would have prevailed. Nevertheless, that it doesn’t appear to have been attempted is disappointing.
Other stake holders left in the lurch
The deal announced is completely lacking in many details on what this means for – employees, customers or society (free speech) in general. The board and top management may get terminated with nice and fat severance benefits, but what about the others?
Musk had already earned the ire of many Twitter employees after trolling them with a tweet on how Twitter HQ should be converted into a homeless shelter as its employees were not coming to office to work. He has also made unsparing comments on Twitter management. In this context and in the absence of details, it does appear the future is a question mark for some if not many Twitter employees.
Further, conflict of interest issues are going to test his commitment to free speech, posing question marks on what this deal means to society. While Musk had no problem calling the Californian government’s Covid lockdown orders as fascist, and even re-opened a factory in defiance of lock down rules, there is conspicuous silence when it comes to truly brutal lockdowns in China. When one of Twitter’s largest shareholders, Saudi Investor Prince Alwaleed rejected the hostile bid, Musk was quick to respond asking him about journalistic freedom of speech in Saudi Arabia. You can bet he would have no such questions about China. With China accounting for around 25 per cent of Tesla’s revenue, and Musk pledging a substantial portion of his Tesla shares to fund the deal, conflict of interest is bound test his commitment and reveal true intent around the deal.
As Janis Joplin sung, freedom’s just another word for nothing left to lose. Whether Twitter customers will have the full freedom to say what they want in the platform will depend on what Musk is willing to lose. Only time will tell whether Twitter as a bastion of free speech would have been served better under democratic ownership (diverse public shareholders with less to lose) or an individual with lots to lose.