Elon Musk, Twitter and Acquisition Mistakes

"Buying Twitter is an accelerant to creating X, the everything app."

Elon Musk’s tweet may one day come to fruition, with Twitter becoming a payment provider, all-encompassing social networking / messaging app and ecommerce gateway.

Who are we to say that this multi-billionaire polymath won’t someday pull it off?

However, in the cold light of day, Elon Musk’s $44 billion acquisition of Twitter looks like a very bad and poorly executed transaction.

That’s because many of the biggest mistakes that can be made in M&A have been made here. These are departures from general guidelines that on their own don’t necessarily indicate that a deal is likely to fail, but certainly increase the chances of failure, based on post-mortems of previous M&A deals that collapsed or created negative enterprise value.

1. Straying outside your area of expertise.

Elon may be one of Twitter’s most notorious users. But he has never before run a social media company. Just because Musk himself has wide design, engineering and technology interests, this doesn’t qualify him as an industry expert, nor does it give him a huge edge. Musk has done well to create something out of nothing on several fronts, but considering his early track record at Twitter, there is a worse case scenario here of creating nothing out of something.

2. Not doing adequate due diligence

In this deal, it was much worse than this – Musk waived his right to due diligence prior to signing the deal. He should have determined the accuracy of information he was relying on before signing the contract. He relied on completely on Twitter’s public filings.

In Twitter’s proxy statement to shareholders, it confirmed: "Prior to entry into the merger agreement, Mr. Musk did not ask to enter into a confidentiality agreement or seek from Twitter any non-public info regarding Twitter."

This rendered him powerless to wiggle out of the deal with his claim of fake account data.

3. Don’t overpay

You would be hard-pressed to find an analyst who didn’t consider the price paid for Twitter at $54 per share too high. Even Musk himself admitted: "Obviously, myself and the other investors are overpaying for Twitter right now".

He spent months trying to back out of the purchase agreement he originally signed in April 2022, but relented just before the case hit the courts as his chances of winning looked slim. He was desperately trying not to buy Twitter. Twitter’s share price was running at $38.63, a huge discount to Musk’s offer price and the social messaging company was highly motivated to win the case.

4. Not having a clear value-add strategy

This business is inherently unrelated to any of his other businesses, so it’s hard to see much synergistic benefit.

The acquisition is not going to increase the market size or the market share of these other businesses. Many Tesla shareholders were so spooked that Musk had bought a social media company to start with, let alone become so subsequently distracted by it, they have been dumping shares. On the date the Twitter deal was accepted, the Tesla share price was $333; at the time of writing this, the share price has more than halved at $150. Some of this can be attributed to the general stock market decline and exodus from growth stocks, but it hasn’t helped that Musk has sold nearly $40 billion of Tesla shares in the past 14 months; dwarfing Tesla's $9 billion of net income over the past 9 months.

He didn’t buy Twitter for its earnings. After going public in 2013, the company didn’t make a profit until 2018, and in 2020 it lost $1.1 billion, improving somewhat to end up just $221 million in the red in 2021.

To buy the business, Elon Musk took out loans of $12.5 billion. Twitter will need to find an additional $1 billion a year of earnings just to service the debt.

Maybe that’s small change for the second richest man in the world, who apparently ‘doesn’t care for economics'. He has said he wanted to make a 'super app' for Western markets. "The reason I acquired Twitter is because it is important for the future of civilisation to have a common digital town square." Arguably, this is as credible as Google's 'Don’t be evil', or Zuckerberg's 'Bring the world closer together'.

Others speculate that Musk’s real desire is to create another payments business. If so, one would have thought there were cheaper, more suitable targets he could have run the slide rule across.

5. Post-acquisition: Don't make big changes too quickly

M&A history is littered with the ghosts of M&A deals that failed because of a culture clash between buyer and acquirer.

Almost immediately after deal completion, Musk declared war on the Twitter culture, banning employees from working from home, closing offices and announcing firings and redundancies that may end up culling 50 per cent of the workforce.

Some of the critical teams that weren’t being made to leave resigned anyway in protest at the new policies. This has resulted in some areas of the operation being in a state of high vulnerability to outages - which have been already occurring across several departments.

Other significant changes were made without full consideration of the impact on users, including the ending of verified blue ticks, which opened the door to thousands of impersonators.

6. Don't alienate the customers

At one stage at least half of Twitter’s top 100 advertisers left the platform, concerned about what was happening around moderation.

A few of them have returned, and maybe others will too, but many are still spooked about Twitter’s neglect of democratic freedoms and plurality of opinion. These concerns began as soon as Musk began overhauling the platform and its moderation policies. White nationalists and other extremists were being readmitted onto the platform, whilst journalists that dared to criticise him are being suspended from the platform, as are users that share the handles of other social media accounts, including Facebook, Instagram and Mastodon.

Understandably, advertisers are worried that their brands will be tarnished through association.

It may still be early days in Musk’s reign but based on any traditional financial or market-based metric, a lot of ground needs to be covered before this acquisition could be regarded as being even close to successful.

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