Elon Musk offers to take Twitter (TWTR) private in an all-cash deal. In this podcast, Motley Fool analysts Dylan Lewis and Bill Mann break down:

  • The details of Musk's offer.
  • How the market is pricing in the probability of this takeover.
  • The issues at Tesla (TSLA 3.57%) that may also warrant Musk's attention right now.

Motley Fool producer Ricky Mulvey interviews Motley Fool analyst Asit Sharma about how investors can find stocks with "escape velocity," and one cybersecurity company that may have "overcome gravity."

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on April 14, 2022.

Dylan Lewis: The Twitter-Elon Musk saga just got a lot more interesting. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined by Motley Fool Senior Analyst, Bill Mann. Bill, it's not every day that one of the richest people in the world decides to make an offer on one of the most visible media brands in the world.

Bill Mann: I don't know what you're talking about, Dylan.

Dylan Lewis: [laughs]

Bill Mann: I haven't seen this news at all. You're going to have to enlighten me.

Dylan Lewis: For anyone who maybe didn't check the Internet today, in a letter [laughs] to the Chairman of Twitter's Board yesterday, Elon Musk wrote, "I am offering to buy 100 percent of Twitter for $454.20 per share in cash, a 54 percent premium over the day before I began investing in Twitter, a 38 percent premium over the day before my investment was publicly announced. My offer is my best and final offer, and if it is not accepted, I would need to reconsider my position as a shareholder. Twitter has extraordinary potential, I will unlock it." Bill, what was your first impression hearing about this?

Bill Mann: I think, first of all, we need to acknowledge that the CEO of Twitter, Parag Agrawal, has had, perhaps, not the paternity leave that he was expecting when he had announced in February that he was going to take some time off for the birth of his second child. He's been busy, thanks to Elon Musk. This $41 billion cash offer for $54 a share is something that the Board at Twitter is going to have to take seriously. Cash offers mean, at the end of the day, that shareholders are going to get bought out. A lot of the things that you would think about from a merger where there's a stock transaction are a little bit different here. At the end of the day, they are going to get cashed out if this deal is accepted. Really, the only element that they have to be focusing on is, is this a sufficient premium to sell the company?

Dylan Lewis: I can't wait for Agrawal's memoir on his first year working as the CEO of Twitter because this is someone who has been sitting in the Executive Chair since November of 2021. This has been an incredible first six months at this position. He's been with the company for a while, but no one could have possibly anticipated that this was going to be coming. Knowing that this is a deal that has to be taken seriously, what do you make of it in a financial sense?

Bill Mann: From a financial sense, it seems that there are so many different things, Dylan, about this. Honestly, I can't get enough of the story. There are so many things about this that are just short-term bonkers. Like for example, Twitter has gone out and engaged Goldman Sachs to advise them on the deal. Presumably, when you go out and get an investment banker to advise you, they're going to come back and say, "You know this deal, it's just not quite attractive enough," which will put Elon Musk's word like this is my final offer to the test. Goldman Sachs has a sell rating on Twitter with a $30 price target. They are simultaneously saying that the company is overvalued. Then some other component of Goldman is going to come out and say that this isn't enough money, doing the math real quick, at 88 percent higher-priced than their price target for the shares so there are a whole lot of things about this that are completely unusual.

Dylan Lewis: It's a good reminder there about the incentives at play, even from the same firm looking at a company in the financial services industry, Bill, right?

Bill Mann: Yeah. Goldman will say that they've got what they call Chinese walls in between these components of their business, and so it's not 100 percent without precedent that they would do something like this. But from an outside view, it's going to be pretty easy for Elon Musk to say, how can you as a corporation, how, as you as the advisor, have both of these views? I guess you will probably see things coming out later. Again, from the time that we record this to the time that it goes out live, thousands of different things might have happened in the interim. But as of now, 1:15 in the afternoon on the East Coast, he hasn't put out a plan. He's just said he's going to be able to unlock value at Twitter. We don't actually know what that is. Again, in some ways, because there's a cash offer, it doesn't matter that much, but it will be fascinating to see if he does come out with a plan.

Dylan Lewis: I'm sure that there are shareholders that look at this very differently, depending on when they became a Twitter shareholder. It's a nice pop on where the company has been over maybe the last couple of months. But you don't have to rewind too far to see people have a cost basis well above this offer price, even within the last year.

Bill Mann: One of the biggest shareholders of Twitter, Prince Al Waleed of Saudi Arabia, has already come out and said, "This deal is priced too low. I do not think that this is close to the value that I would expect Twitter to be at." You would expect the largest shareholder to come out and say such a thing, and it could be posturing or it could be something that he absolutely positively believes that Twitter is going to be more valuable as an operating company. But I can't figure out, Dylan, for the life of me, who is having the hardest time right now because it bears remembering that Elon Musk came out and filed a 13G originally, and then he filed a 13D, which is something that you would have to do as an activist shareholder for the 9.4 percent stake that he's already acquired. Now, he's come out, and he's trying to acquire the entire thing. Now, I'm not a securities lawyer, but I'm pretty sure that this is not how someone is supposed to do. This is something that is going to attract interest from the SEC. Elon Musk has been a magnet for interest from the SEC for a long time, and I don't think that he minds that all that much. But you've got to wonder who's had the hardest week, whether it's been the management at Twitter, whether it's now the Board at Twitter, or whether it's actually the SEC?

Dylan Lewis: I would say Musk's lawyers probably also had [inaudible]. [laughs]

Bill Mann: [laughs] Can we pour one out for the lawyers? Something you would never ever say. [laughs]

Dylan Lewis: This is all in the public eye, happened really over the last two weeks. We have the 13G filing rather than the 13D filing, then we had the corrected filing that got later pushed through. We had he's joining the Board, just kidding, he's not joining the Board. I think there might have been some posturing there both by Twitter and by Musk on trying to limit the reach that he would have with this organization. I know one of the first things that came out as we were looking at whether he would join the Board is, would he be OK with capping his ownership stake? I think, as that became something that was clear as part of that Board seat, we realized, no, he's not going to do that.

Bill Mann: No, exactly. I think it's important to note that Twitter does not have a dual-class shareholder structure in place. So if he pushes, I really think that he will be able to get this transaction done, even if they have to go hostile with them. He's a master of the narrative. You know what's not being talked about right now? Supply chain issues at Tesla. Suddenly, what's going on in Shanghai, the factory perhaps being impacted by the zero-COVID policies in China. Nobody is talking about those at all because we're talking about, what, really, honestly, for Elon Musk is pocket change, what he might be doing at Twitter.

Dylan Lewis: He's entirely in the driver's seat here. He wrapped up this filing. He said, "Best and final, I am not playing a back-and-forth game." We'll have to see whether that's true or not. He has moved straight to the end. He says, "This is the high-price, and your shareholders will love it," and he ends, and I think this is important to zoom in on, "If the deal doesn't work, given that I don't have confidence in the management nor do I believe I can drive necessarily change in the public market, I would need to reconsider my position as a shareholder."

Bill Mann: Oh my gosh, that is it. [laughs] It's truly, "Hey, nice company you have here [inaudible] . Pity if something were to happen to it." 

Dylan Lewis: It's a little bit of a strong arm, isn't it? From his perspective, he basically has the opinion that, I can own this outright, or I'm going to walk away from it.

Bill Mann: Walk away from something that may be greatly diminished just from the point of my adventurism to this point. Again, what an unbelievably bad paternity leave.

Dylan Lewis: Just unbelievable timing. I think to bring this down to the average investor, Bill, it's easy to look at these types of headlines just types of move and say, this offer price is above where our shares are currently sitting. We have to price some risk in for that and that's why we see that in the market. If I'm sitting on the sidelines and interested in this, what should I be making of this whole saga and where this can go? I think that the answer, based on the past and funding secured with Tesla, is don't bank on any deal necessarily.

Bill Mann: The market absolutely is not. Once again, there will be a little lag between the time that we have this conversation and people who are able to access this interview. But at the moment, Twitter is trading about 20 percent below what its takeover price would be, so the market does not necessarily believe that the transaction is going to happen. I wouldn't begin to know how to handicap this, but if you believe that Elon Musk has the capacity to make this transaction, that's 20 percent of money that is sitting on the table for the take. Now, Dylan, I have to say, I don't think, ultimately, that this is going to go through, if for nothing else. Good gosh, could you imagine Elon Musk becoming the person who is responsible as the spokesman for Twitter, being hold before Congress for you whenever they have their nerd forums? They bring in Tim Cook, and Elon Musk is one of them. But I just don't think he has the stomach for this.

Dylan Lewis: That sounds like his nightmare.

Bill Mann: It sounds like fantastic content for us.

Dylan Lewis: There's a lot of really good father in that. I don't think that's where he wants to be spending his time, on Capitol Hill.

Bill Mann: I really don't either.

Dylan Lewis: On the note of that discount that we're currently seeing and maybe the opportunity that some people are seeing in that, before I joined the Fool, I worked at a place that had a merger arbitrage division, and my boss very eloquently described it one time as trying to pick up pennies in front of a steam roller.

Bill Mann: That's right. In this case, you're trying to pick up because there is a pretty substantial discount. Usually, when there is a transaction announced, there's funding in place, they come out with a full plan, and usually, you will see the market get it pretty close. It'll be within one or two percent. Twenty somewhat percent is a remarkable discount, but this is really a transaction almost without precedent in terms of its structure and in terms of its implications. I love having opinions on things. I bet you your old merger arbitrage boss is having a field day with this.

Dylan Lewis: I think it's probably a busy day at the office for them. [LAUGHTER] For folks that want to get a better sense of where this story's going and what the next steps are, what can we be watching for in the timeline?

Bill Mann: I think what you're going to see next is a response from the Board, and it could be one of two things. It could be an outright rejection, or it could be a feeler for whether this really is his highest and last offer. The next step is going to come from the Board, and I don't think they will take very long. Again, unlike a lot of other companies, they don't have much of investor protections in place which are actually business protection. They don't have a poison pill. They don't have a dual-class share structure. They are trying to figure out right now whether they are dealing with an honest broker in Elon Musk because they have to. They, unlike Elon Musk, have a fiduciary responsibility to shareholders, so they have to respond to him in an honest broker way. The next step is going to be a response from them, and you will see almost instantly in the share price what next steps are going to come from that response.

Dylan Lewis: Hopefully, that doesn't happen in the next 2.5 hours and we can put the show out as recorded. Bill, thank you so much for joining me.

Bill Mann: Thanks, Dylan.

Dylan Lewis: Twitter has been a gathering spot for investors discussing stock's poise to go to the moon, producer Ricky Mulvey and Asit Sharma borrow another celestial metaphor to talk about companies that can weather the current tough environment for stocks.

Ricky Mulvey: When you hear the term escape velocity, you might start thinking about rocket ships, but you might want to start thinking about stocks. Joining me to discuss why is Asit Sharma, a contributing learner and a Senior Analyst for The Motley Fool. Asit, good to see as always.

Asit Sharma: Same, Ricky. This isn't some story about me wanting to grow up to be an astronaut. I never had that aspiration.

Ricky Mulvey: I think it would be fun but then I realized how long you just have to spend in space by yourself or with a small group of people, and that terrifies me.

Asit Sharma: There were those songs like, Elton John had Rocket Man, which made it sound not so appealing to be up there for a long time, so there's that.

Ricky Mulvey: Yeah, alien. There's some spooky stuff going on in space, but you've been thinking a lot about the concept of escape velocity and how it relates to different stocks, and you said we got to do a podcast segment about it. So I guess, what got you thinking about it, and essentially, why should investors care about this concept?

Asit Sharma: Yes, Ricky. I was working with some fellow analysts, putting together service at the Motley Fool, and we are in a different environment in 2022, so we have to focus on where the market is pushing interest rates, we have to focus on inflation. That affects how you look at stocks. This meant for us, maybe trying to find a balance between two poles of stocks. We still love growth stocks, we call them catalysts in the service, but we love compounders too. The only thing was, as we were thinking through this, a compounder sounds like a boring type of company, and who wants to buy an annuity-type business? You always want a growth business, even if it's a more steady grower. This got us thinking, what if you find companies that have really gotten beyond that stage of boring growth? They're never going to be catalysts again, but they have been able to get past their limits, and this is where the idea of escape velocity comes in. You need a certain amount of force and speed to escape the gravitational pull of a larger object.

Ricky Mulvey: You need speed, but I think it's a little trickier with stocks, but the analogy still works when I think of escape velocity. It doesn't matter how large that object is, but I think it's a little bit different in the stock market because you've talked about it from a very small market cap company would have a more difficult time achieving escape velocity than something with a larger market cap.

Asit Sharma: A small company which has a lot of growth potential, a lot of revenue growth ahead of it, and earnings power, that might seem like an escape velocity company, but it's really not. Think of that as a company that is on the launch stage, and it's still got to fire those boosters and accelerate. We're thinking more about that constraint of gravity. Gravity can take many forms. I mean, competition is one. If you have a company that when it was younger, was fighting against the competition but now has reached that stage where competition is less of a risk. It's more about extrapolating, increasing value out of the market. NVIDIA for me comes to mind as a company that's done that. Sure, it competes with other big semiconductor companies, but it's got its niche, and it's really broadened out into several revenue streams. Now for NVIDIA, it's about growth. It's about making sure that it pumps every available market, whether that has to do with automation, whether it has to do with virtualization or the chips we need in gadgets. This is something that every company aspires to, but few companies can get beyond that initial gravitational pull.

Ricky Mulvey: Is that just competition or do you think there are other gravitational forces that would prevent a company from achieving escape velocity?

Asit Sharma: I think there are several, and Foolish investors know that so much of a company's success comes down to its people. When a company is in the early stages, when that rocketship has rolled to the launch pad, we don't know a lot about management. We get to observe truly great companies, the ones that aren't merely compounders, but the ones that are just doing that extra bit of value creation, and we had to observe how management makes its capital allocation decisions, how they react to crises, the people they choose, the people they hire. This helps you escape gravity once you've got that team in place, and they execute year after year after year. You see that effect stronger and stronger. It helps get to that constant speed that you were talking about.

Ricky Mulvey: We also talk about gravity as well. If you're talking about the traditional rocketship, gravity is going to stay a constant. But I think in the sense for stock investors, you're going to have different gravities for different companies in different industries as well. When you think of a company that's escaping that gravity, that's achieving that escape velocity, you're saying you don't measure it on the ground, you measure it closer to the atmosphere, maybe where the satellites are in space. What's another example you think of a company that's maybe close to achieving that escape velocity, not the size of NVIDIA but has the chance of getting there?

Asit Sharma: I think there are many companies that fit the bill, one that comes to mind is CrowdStrike. This is a company that plays in a really fast and evolving market so that is the cybersecurity market. It has an amazing platform which has attracted a lot of enterprise customers over the last several years. Their net dollar retention rates are really high. The company has a history of growth. But despite having fierce competition from companies like SentinelOne, which is a peer in this space, and other cybersecurity companies, they have this ability to penetrate the market. There's still a lot of growth ahead, but now you can worry a little bit less about the competition. They're proving themselves as a quantity out there in this industry. This is a company that I think is very capable of reaching that escape velocity. To use your analogy, yeah, it is higher up. It's left that stage. It's approaching that stratosphere, and you could see at a certain point in time, with the deep relationships it has with its customers as they stay on its Falcon platform, and they sell more products to these customers, they could keep going, maybe never constant speed. That's one reason I appreciate you so much, Ricky. You're really great at punching the holes in the analogies. We should say, as you're chatting about before we came on this taping, in space, once you reach escape velocity, it's just this infinite path. There's no real resistance now. You're going forward. That doesn't really work with companies. There are always challenges that come up, so this is something we have to think about.

Ricky Mulvey: The Voyager satellite is not coming back to earth anytime soon, if at all, and these companies can definitely fall down. Now, it is to say that, let's say, a company that's achieved escape velocity, or as Tim Sparks, our engineer said, become Jupiter, Apple has a very small probability of a falling back down to earth becoming, let's say, a one billion dollar market cap, but it isn't impossible. Continuing with the CrowdStrike example, what do you think it's doing differently than its competitors that allows it to achieve that escape velocity potentially?

Asit Sharma: I think that CrowdStrike is very good at focusing on what makes its platform different in the marketplace. They were a pioneer in this real-time data analysis that could be shared among all points in its systems. So if they find a problem, they isolate it. They extrapolate what's happening, and they can quickly spread the threat prevention all across their networks so all users get the benefit of the single isolated incident that they have treated. What you do best is sometimes the thing to keep focusing on, not to get diffused and try to sell every last service to every possible customer. Focus is really hard for growth companies because management always feels the pressure to deliver that growth. This is one of the things that pulls a lot of subpar management teams off a great game, the inability to be courageous. Focus on what you do best and get better at it. I think this is one of the things, as you know, it's an intangible that's helped CrowdStrike really excel in the marketplace and has enabled them now to expand the offerings within their platform.

Ricky Mulvey: Asit Sharma, always a pleasure talking to you. Any final thoughts on escape velocity that you think about as an investor before we wrap up?

Asit Sharma: I think the one thing that comes to mind when looking at this concept is you don't have to have a perfect metaphor if you want to use us in your own investing. Really, the spirit of it is more important than checking off all the boxes, just as for those of you who are listening and were kids who wanted to get into space but never made it to NASA, you still have that interest in astronomy. You still follow launches, you're still learning. Nothing has to be the ideal in investing, and for this metaphor, the same holds.

Ricky Mulvey: So you're telling me I wasted my time watching the YouTube videos from physics professors explaining escape velocity. Appreciate it, Asit.

Asit Sharma: That was time well spent, Ricky. You educated me in the process. [laughs]

Dylan Lewis: That's all for today's show. We're back tomorrow with the radio show. As always, people on the program may have interest in companies they talk about, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis, thanks for listening. We'll see you again soon.