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Musk v Twitter, the lessons for investors

22 Apr 2022 2 month(s) ago

Elon Musk's proposed hostile takeover of Twitter has a lot of lessons about stock markets and the media

Elon Musk’s proposed hostile takeover of Twitter is fascinating for what it reveals about stock markets and big investment funds. It is exposing just how financially strange social media and conventional media have become.

The weirdest part is Twitter's failed business model. The web site explains why:

Twitter is not a platform built around a website; Twitter is a platform for comments and discussion that operates in the sphere of social media.  As a consequence, the technology and data processing required to operate the platform does not have an economy of scale.

There is no business model where Twitter is financially viable to operate…. UNLESS the tech architecture under the platform was subsidized.

In my opinion, there is only one technological system and entity that could possibly underwrite the cost of Twitter to operate.  That entity is the United States Government.

This merger of US big government and tech companies starts to explain why, over the last two years social media companies, especially Twitter, are doing something rarely seen in business life: telling many of their customers to go away. They are cancelling the accounts of users using the excuse that it is a violation of what they deem to be “community standards”.

Compare this ‘content moderation’ and shadow banning with Twitter’s vision statement, which says the company aims to: “give everyone the power to create and share ideas and information instantly without barriers” in order to improve “a free and global conversation.” That is an ideal that has long since been thrown in the bin.

Removing customers might be excusable as a targeting strategy if Twitter actually made a profit. But it does not. It has only been in the black in two years of its existence and last year made a $US220 million loss. It has always been a bit of a mystery why a company that has made so many losses should be valued so highly. It is probably why in the months leading up to Musk’s bid, the share price was steadily falling; in March it was down by more than half from its peak a year ago. Musk’s valuation of the company at $US43 billion is over 60 per cent higher than the shares were trading in February.

Twitter's share price would almost certainly have continued sliding were it not for Musk's bid:

The corporate moves so far have been fairly straightforward. The board instituted what is called a poison pill defence whereby, if Musk’s holding goes above 15 per cent, the other shareholders will be offered new, discounted shares to dilute the predator’s value. Poison pills are not unusual, but they are high risk. As Musk observed (on Twitter): “If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty. The liability they would thereby assume would be titanic in scale.”

Musk can get around the problem by joining forces with an investor consortium, whereby other friendly players purchase below the 15 per cent level and together they acquire a majority. He may also appeal to retail investors, such as the Apes Army, who defended AMC Entertainment and GameStop against attacks by hedge funds.

There is of course no guarantee that Musk will succeed and the market does not seem to think he will. At the time of writing the share price is trading below his bid price. But offers can come from anywhere and whatever transpires Twitter is likely to experience serious upheavals that could threaten its survival. Companies that make losses are never in a strong position.

Musk’s bid is drawing attention to the bizarre state of social media and conventional media. For one thing, how can a mature social media company that is destroying value be rated so highly? Amusingly, the broker Goldman Sachs, which has been brought in to argue that Musk has undervalued the company at $54.20 a share recently advised investors to sell at $30 a share (ironically, something pointed out on Twitter).

One answer seems to be that Twitter is so important politically, in its role as what Musk has called the global “town square”, investors are willing to turn a blind eye to its financial performance. Another possibility is that large institutional investors are being seduced by hype, which is not uncommon in the digital world.

A third possibility is that the company is just big because it is big, a kind of investment circularity. The largest investor in the company is Vanguard whose investments (mostly exchange traded funds) are passive. Vanguard simply allocates money proportionately across a market, or sector. A fourth possibility is that, because of Twitter’s importance in shaping ‘the narrative’ (to use that hackneyed phrase), it gets surreptitious support from elements within government.

If Twitter makes little financial sense the legacy media makes even less. It is hostile to Musk’s move because of the fear it will change Twitter’s politics. Mainstream media depends on social media for its story distribution.

They have reason to be apprehensive because their audiences are tanking. Citizen Free Press, a modest aggregator site that does not produce its own content, and is mainly run by one person, gets more traffic than outlets like the Wall Street Journal, Politico, NBC News and CBS News. A finance news aggregator, Zero Hedge, gets more traffic than ABC News and the LA Times. The mainstream media has lost its authority and the audience is turning to other sources.

Musk says that he has long had a “pathological interest” in the truth, probably a side effect of having Asperger’s syndrome. He expresses a fierce, and apparently sincere, belief in the need to protect free speech, although of course he will have other agendas.

It is thus shaping to be one of the most revealing corporate battles in US history. Musk may be the world’s richest man, worth about $US260 billion, but arraigned against him are even bigger financial players – the managers who control much of the world’s wealth and power. There are three such groups and they tend to move in concert. First is the fund managers who control $US100 trillion. These funds dominate the shareholdings of the global corporations, which are also mostly run by professional managers. The big corporations then exert control over government bureaucracies – also run by managers – using various mechanisms such as private-public partnerships, outsourcing or privatisation.

It is a powerful troika. Musk may be arguably the world’s most successful capitalist but he is a mere billionaire. He is going up against the trillions controlled by the titans of managerial capitalism, with all their entrenched interests. It is a David versus Goliath battle that will indicate a lot about who really runs the capitalist system.


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