Long-read: Has the twit hit the fan?
THE HOT topic in tech over the past week or so has been Elon Musk’s hostile $43bn bid for Twitter, which set off a firestorm of, well, tweets.
Some claimed Elon Musk was riding to the rescue of free speech, others that his success would mark another step towards the breakdown of democracy. In all this talk, only one set of interests seem to be mainly missing from the discourse, namely the rights of shareholders – arguably the most important group in the fight.
First the facts. Musk’s bid of $54.20 per share represents a 38 per cent premium to the share price on April 1st, 3 days before his 9.2 per cent stake was disclosed. However, that bid is around the same share price that the shares were trading in early November 2021 and over $70 a year ago. So it is fair to say that his bid should not be viewed as a knockout one.
OPPORTUNITY TWEETS
Instead, it feels opportunistic. Musk’s suggestion that he may walk away from his stake if his bid is not accepted seems a rather unsubtle warning to shareholders given such a move together with the removal of any bid premium would likely see a collapse in the share price. Shareholders are therefore being given a classic “take it or leave it” option although, as always with Elon Musk, his ultimate intentions remain unclear and his suggestion of a “Plan B” if his bid is rejected may point to the involvement of a third party.
Meanwhile, Twitter has responded with an old-fashioned poison pill strategy, namely if any shareholder (perhaps one rhyming with Leon Tusk) gets above 15 per cent, it will offer shares in Twitter at a heavily discounted price to any shareholder, bar Musk, to dilute the latter’s holding.
Poison pills have lost some of their potency since their heyday in the 1980s, but the general consensus is that any legal challenges to the Twitter board is likely to fail, at least on the substantive issues. The pill expires after one year and often these sorts of tactics are there to either elicit a better bid from the bidder via negotiations and/or to buy time for other bidders to enter the fray.
WHY NOT MUSK?
What Twitter management have not done so far, though, and which they probably should do, is offer a coherent and credible counter-argument as to why they think they can create more value for shareholders.
Twitter’s full year results in February missed consensus expectations for revenues, earnings and users according to CNBC.com and, while the company talked on its conference call about how recent trends had suggested an uplift in new registrations, there was nothing necessarily concrete as to how Twitter was going to grow its subscriber base by 45 per cent in two years from 217m mDAUs – monetisable Daily Average Users – at the end of 2021 to a planned target of 315m mDAUs by YE23 (to put in context, Twitter’s mDAUs grew 65m in two years from the end of 2019 to the end of 2021).
Twitter’s issues really stem from three core problems. First, and the crux of the issue, is that Twitter is not a mass market platform, despite the noise it generates. Compare the less than 220m mDAUs at the end of 2021 with Meta’s – nee Facebook’s – 1.93bn at the same date. If you rely on advertising revenues, as Twitter does, you need scale.
What I call second tier advertising platforms such as Twitter and Spotify are finding – I call them second-tier because their audience base is nowhere near as great as the leading platforms – is that it is hard to build the advertising revenues needed to justify the valuation because they are not really “must have” platforms for advertisers (plus, in Twitter’s case, advertisers can feel wary given the controversy the platform’s users can create).
SUBS STRUGGLES
That leads onto the second problem. If you cannot build a credible advertising model, you need to go down the subscription route. However, unlike Spotify, Twitter does not have a credible subscription model (at least currently) so it is hard to see where it goes from A to B in order to get people to suddenly pay. Moreover, if it tries too aggressive a shift over to subscription, it risks losing users, which leads to a loss of scale and a loss of advertising revenues.
Thirdly, and leading on from the second problem, is the question of its user base. Twitter’s user base is niche, one that is disproportionately influential and engaged relative to the general population and who have come to treat it as some form of public utility to message and chat.
More problematically, many seem to see it as their “right” to do so without paying fees. When you are dealing with such a base, it is not only going to be very difficult to move such users out of their comfort zone but also is likely to create a very public backlash unless handled well.
BETTER OUT THE LIMELIGHT?
All of which points (in my experience) to a company that is maybe better being out of the glare of the public markets and needs time to go through a deep re-thinking of its strategy and aims in an environment where it is not subject to highly visible public scrutiny. That is not to say that Elon Musk’s bid is the right one. However, it is to say that the Twitter Board needs to come up with its own credible Plan B – and fast.
Ian Whittaker is twice winner of the CityAM Analyst of the Year as well as a judge on this year’s awards, and founder of advisory firm Liberty Sky Advisors