Twitter – Price of free speech pt. II

Poison pill is a lawsuit waiting to happen.

• Twitter’s board has adopted a poison pill in an attempt to block a take-over by Elon Musk in what could easily be argued is a breach of duty to the shareholders leading to one or more lawsuits.
• The board of Twitter has adopted a rights agreement that it says protects shareholders by making it very difficult for Elon Musk to take over the company.
• This particular poison pill works by issuing new stock to all shareholders except anyone who holds over 15% which would have the impact of diluting their stake making it much harder to take over the company.
• The problem with this move is that it confirms that the board believes that the offer that Elon Musk has made at $54.20 per share is not in the best interest of shareholders which I think is a difficult argument to make.
• I am reminded of when Microsoft bid $44.6bn for Yahoo in 2008 which the company very foolishly rebuffed causing shareholders to lose a large proportion of their investment over the next 10 years.
• The issue here is that there is more than just money at stake as Mr Musk wants to take over Twitter to make it “the platform for free speech around the globe” as well as change its content moderation policies.
• This is rapidly descending into a political disagreement over what constitutes free speech with the views of Twitter’s board and Elon Musk being directly opposed to one another.
• It is on this basis that I suspect the board is trying to block the takeover and here I think that it is on very thin ice when it comes to fiduciary duty.
• The shareholders of Twitter own the company in order to earn a return on their investment not to be active in politics and in that regard, the board has to make the case that Musk’s offer undervalues the company.
• This is why the shares rallied yesterday as the market is anticipating that Musk will have to up his offer in order to get the shareholders to sell their shares.
• However, I think that if the deal fails and the shares collapse, there will be a series of shareholder lawsuits against the company for breach of fiduciary duty.
• This is because it is very easy to make a fundamental case that at $54.20, shareholders are being offered exceptional value for their shares.
• The argument that the offer is too low because the shares recently traded as high as $80 per share has no merit whatsoever.
• This is because if the shares are worth $20, the fact that someone was irrational enough to pay $80 for them does not alter the fact that they are still overvalued at $54.20.
• In the last 3 years, Twitter’s operating losses have been greater than profits in aggregate to the tune of $100m but the company has generated a total of $2.9bn in cash from operations.
• However, cash generated from operations has declined in the last three years leaving me wondering just how much cash Twitter can sustainably generate for its shareholders.
• In a steady-state Twitter would need to generate around $3.4bn in free cash flow in order to justify the valuation that Mr Musk is offering to pay shareholders now.
• Twitter has averaged about 1/3^rd of this level over the last 3 years in the best instance.
• There are not many people who are going to argue that Twitter’s best growth is now well behind it as attempts to diversify it from its niche have failed to deliver good results.
• Hence, I don’t think that a hefty premium for growth is warranted.
• The long-term outlook is that Twitter will continue in the niche that it completely dominates and as such, I can’t see how it will generate the cash to justify even the price Mr Musk is offering.
• The net result is that I think that a lawsuit against the company for breach of fiduciary duty has legs should it continue to fight against Mr Musk and he gives up and the share price collapses.
• Even at yesterday’s closing price of $48.45, the market is paying far more than the company is worth meaning that if I owned the shares (which I don’t), I would be heading for the exit.