If you’ve followed M&A activity as closely as some of us merger arbitrageurs have over the past few years, the battle for Twitter (NYSE: TWTR) immediately raises some thoughts about how things might play out. the The size of the deal for Twitter at $43 billion is very large and there are very few private equity firms capable of making such a deal. Sifting through our database of more than 2,500 public company mergers and acquisitions over the past 12 years, less than 1% of them exceeded $43 billion.
Many of these mega-mergers have failed, including Pfizer’s (PFE) attempt to merge with Allergan in a tax inversion scheme, Shire’s acquisition by AbbVie (ABBV), and Time Warner’s acquisition Cable by Comcast (CMCSA). The mega-deals that didn’t materialize failed primarily due to regulatory issues and that’s the second thing that comes to mind when looking at this potential acquisition of Twitter.
There has been a lot of talk in recent days that Twitter is in the game and that companies like Meta (FB), Alphabet (GOOG) (GOOGL) or Snap (SNAP) might be interested. Unfortunately, the FTC, under the leadership of Lina Khan, is unlikely to approve a merger with a strategic company. It’s one of the reasons Microsoft’s (MSFT) pending $69 billion acquisition of Activision Blizzard (ATVI) is trading at a wide spread of more than 20% off the acquisition price. of $95 per share.
The most likely scenario is for Elon Musk to partner with a large private equity firm like Michael Dell did when he took Dell Technologies private in a $24.4 billion leveraged buyout. dollars with the help of Silver Lake in 2013. There is speculation that Thoma Bravo might be interested in acquiring Twitter. and it’s entirely possible as they’ve been very active in acquiring tech companies in recent years. As reported in our last Merger Arbitrage Mondays article, they acquired six companies for $32.3 billion last year and announced the acquisition of two others, including SailPoint Technologies (SAIL) and Anaplan (PLAN) for 17, $6 billion this year.
Musk said Thursday he has $46.5 billion in funding and, according to SEC filings, he plans to go hostile by directly addressing shareholders since Twitter’s board does not engage with him and adopted a poison pill. As a few tweets have hinted over the past few days, he is likely to present shareholders with a tender offer allowing them to offer their shares at a predetermined price or price range. If the takeover bid is successful, it would give him the opportunity to acquire a majority stake in the company and possibly restructure the board. In a rather unusual Tweet, Jack Dorsey also signaled his frustration with Twitter’s board.
…which brings up the poison pill provision if an investor acquires more than a 15% stake. The poison pill provision would allow existing shareholders to acquire more shares (excluding the investor who triggered the poison pill), thereby massively diluting the potential acquirer’s stake.
This situation reminds me of Oracle’s (ORCL) contentious battle to acquire Peoplesoft in 2003. Oracle offered Peoplesoft $5.1 billion to acquire the company. In an attempt to steer Oracle away, Peoplesoft not only passed a poison pill provision, but went even further by offering customers up to 5 times the cost of their software licenses if the company was acquired within next two years and support for their software. passed away in four years.
The long and contentious battle lasted 18 months, ended in court and saw Peoplesoft investors nearly double Oracle’s original offer when deal size soared to 10.3 billions of dollars. In an interesting twist to the Peoplesoft saga, Peoplesoft founders Aneel Bhusri and Dave Duffield took their newfound profits and started a company called Workday (WDAY). Workday is now a $56 billion giant that rivals Oracle in several software verticals.
Musk or whoever acquires the company have their work cut out for them. This Twitter thread by the ex-CEO of Reddit offers a great perspective on the challenges of running a social network. A few weeks ago, I experimented with advertising on Twitter by promoting this thread on Harold Hamm’s insider buying of energy company Continental Resources (CLR). The results were absolutely dismal and I disabled the ad campaign in no time.
The thread was getting a lot of likes, but the kind of people who liked it didn’t seem to be investors, didn’t seem interested in the energy sector, or inclined to follow insider buying as a strategy. In other words, Twitter, with all the wealth of information it has about each account, did an extremely poor job of displaying the promoted Tweet to the correct target audience.
Fixing their matching algorithms is just one of the many things a new owner can fix. In my last Twitter post on Seeking Alpha, I outlined several other things the company should fix. Interestingly enough, the DCF model I used to find intrinsic value for the company in this article, put the fair value at $55.15, just slightly above the $54.20 offer of Musk.
We wrote the following about the model in this article:
“Plugging the next two years of analyst consensus estimates for 2022 earnings of 20 cents per share and 2023 earnings of 90 cents per share into a DCF model, assuming a 35% EPS growth rate in Year 3, down 3% per year to 2031, a discount rate of 8%, and a terminal growth rate of 2%, I get an intrinsic value of $55.16 per share, a reduction of 53% per compared to the current price. A DCF model is only as good as its assumptions and it is entirely possible that the future could play out differently.”
When Musk first unveiled his offer, as a shareholder of Twitter, I was skeptical that a deal would be struck due to the size of the deal and the fact that the board didn’t did not engage with him. Over time and new information, the likelihood of a deal occurring appears higher than I originally anticipated.
The silver lining for long-suffering Twitter investors is that the stock is holding up well due to this potential deal despite the fact that most tech stocks have been hit hard in recent days. Twitter is a unique property that has a lot of untapped potential. I think shareholders would do well to stick around and see if a deal pans out. Given current market conditions and the Fed’s plan to aggressively raise interest rates in the near future, Twitter shares may fall significantly if a deal doesn’t materialize.