Tesla CEO and billionaire Elon Musk is ratcheting up his efforts to buy social media platform Twitter (TWTR) to take it private. Earlier this week, he reportedly arranged $46.5 billion in financing to make a tender offer of $54.20 per share after Twitter's board adopted a poison-pill plan designed to discourage a takeover.
Shareholders of Twitter, and the investment community as a whole, are trying to grapple with these events and determine what the best course of action might be. It's a complicated and unpredictable situation, but regardless of the outcome, Twitter could struggle to reward investors, and here's why.
Image source: Getty Images.
The upside is limited if Musk succeeds
Musk's pursuit of Twitter is pretty straightforward: He has deep ties to the platform and his account on it has 82 million followers, making him one of Twitter's most-followed users. He's said that he is concerned about censorship on social media and he desires to take control of Twitter to preserve free speech on the platform.
Musk is offering approximately $54.20 per share for the company, about $5.55 per share higher than where the stock currently trades. In other words, investors can buy shares of Twitter right now at $48.65 and make about $5.55 per share (about 11.5%) should Musk successfully buy the company at that price.
It doesn't sound like a bad deal for shareholders; the stock traded in the mid $30s before Musk revealed he owned a big stake in Twitter in early April. Twitter has historically been a poor investment, its share price virtually flat from its initial public offering in 2013. The offered price would at least give shareholders a chance to make a profit on their investment.
Failure could mean shares fall
But Twitter investors could face volatility if Musk fails in his takeover attempt. The stock could quickly drop to where it traded before the buyout news: around $33 per share, meaning more than a 20% downside.
More importantly, shareholders have to determine the long-term investment thesis behind Twitter. The company has grown revenue but struggles to generate meaningful free cash flow or bottom-line profits.
TWTR revenue (TTM). Data by YCharts. TTM = trailing 12 months.
Founder Jack Dorsey also stepped away from an active role in the company in November 2021 to focus his efforts on Block. Perhaps an activist or some form of external leadership is needed at Twitter, and where will that come from if Elon Musk fails to buy the company? I can't help but think Twitter is like a ship without a rudder: It exists, but where is it going?
Weighing the risk versus the reward
Many investment decisions boil down to the relationship between potential reward and risk. Investors could get a solid, roughly 11%-12% premium on Twitter stock if Musk's bid is successful at $54.20.
On the other hand, investors could run away from the stock if Elon Musk abandons his bid to buy the company. There's more than a 20% downside to where shares traded before he stepped in, and selling pressure could increase if he sells his 9.2% stake in the company after failing.
Meanwhile, Twitter hasn't yet proved to be a successful business (I'm a fan of the platform itself) despite hitting the public market years ago. So what exactly are investors hanging their hat on? The long-term picture is unclear due to the company's recent leadership change and past failures, so unless you believe in the platform over the long term, I'm struggling to see the upside to buying shares.
