Twitter – The price of free speech pt. IV

The board caves to shareholder pressure.

• Twitter’s board has grudgingly accepted Mr Musk’s offer to acquire Twitter which I suspect is going to involve a complete management and board clearout and much greater clarity on content moderation policies.
• Mr Musk’s offer of $54.20 per share is being recommended by the board meaning that barring regulatory hold-ups, the deal now looks very likely to go through.
• I suspect that an uncomfortable weekend of calls where large shareholders pressured the board into executing its fiduciary duty was responsible for the change of heart.
• This is because the argument that $54.20 undervalues the company is very difficult to make and is getting harder as the market continues to fall.
• It is not difficult to make a fundamental case that at $54.20, shareholders are being offered exceptional value for their shares.
• Furthermore, 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 every year in order to justify the valuation that Mr Musk is offering to pay shareholders now.
• Twitter has averaged about 1/3rd 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 do not think that Mr Musk really expects to make money from this acquisition which is why this is really about an ideological disagreement over what constitutes free speech with Mr Musk on one side and Twitter’s board and management on the other.
• For the moment, it looks like Mr Musk has won the battle which almost certainly means that when the deal is closed, the entire board and management team will be replaced with individuals who are closer to Mr Musk’s view.
• The danger here is that Twitter becomes an echo chamber for Mr Musk’s view which is why the new management team should have balance between the two sides which is what I think is most likely to result in the best outcome for Twitter as a platform for free speech.
• I suspect that clearer and more consistent moderation policies will also be created which will make it much less arbitrary in terms of who gets censored and who does not.
• There are some very large discrepancies on the platform in terms of who is blocked and who is not which I presume Mr Musk intends to level out.
• This remains an excellent result for shareholders of Twitter who failed to sell at $80 as now they have the opportunity to sell at $54.20 rather than $20 which is probably closer to what the shares are worth.
• If I owned the shares (which I don’t) I would be selling my shares to Mr Musk without delay.