We've been questioning the myth of Elon Musk for about a decade now, starting back when only a handful of other commoners were taking that position, and one of the things we've learned is that explaining his actions is always going to be far more complicated for those who insist on holding on to the Elon is a genius axiom.
Again, it’s plausible and even probable that Musk has simply made a series of bad choices. As smart as he is, he does have an impulsive streak and a lot of anger inside of him. At the DealBook Summit, he admitted that endorsing the antisemitic tweet was a mistake. He told the interviewer, Andrew Ross Sorkin, that he had “demons” in his mind stemming from an unhappy childhood.
But let’s get to the weird theory that Musk is doing all of this deliberately in a way that benefits him in the long run. It starts with the fact that he realized soon after he bid for the company that it was a mistake and tried to back out of the deal, but wasn’t able to extricate himself. So he was uncomfortable with owning X to start with. Then he made management mistakes, such as firing essential employees. And, crucially, interest rates rose sharply, raising the cost of servicing the bank loans he took on to finance the deal.
Let's stop for a moment and correct a small but non-trivial point. There is no evidence that Musk was ''uncomfortable with owning X." There is tons of evidence that he was uncomfortable with the amount of money he had to pay for it. As Alex Heath observed in the Verge "Everyone knew that Twitter wasn’t worth $44 billion when Elon Musk bought it a year ago." To those of us following at the time, the pattern was familiar. Musk was talking big on Twitter, someone called him on it and he tried to weasel out. (Remember how his promise that Tesla would design and manufacture all the ventilators ICUs needed in the pandemic ended with him shipping a few hospitals some off-the-shelf CPAP machines?)
... There’s something in finance called gambling for resurrection. It’s when you’re down so far that you don’t have much more to lose, so you’re willing to take big risks in the hope of recouping your losses. The theory is that Musk is gambling for resurrection with a triple bank shot that probably won’t work — but just might.
The main proponent of the crazy-like-a-fox theory, as far as I can tell, is Eric Talley, a professor at Columbia Law School who specializes in corporate law, governance and finance. I interviewed him on Thursday. He admitted, “I am still uncertain myself” whether Musk is engaged in “a diabolical strategy embedded in a four-dimensional chess move” or just being erratic.
If it is 4-D chess, he said, it’s that Musk is trying to harm X in the short run to get the banks that have lent him money to accept that they will have to “restructure” what he owes them — that is, lower the interest rates, extend the payment periods or write off some of the debt altogether. Once that dirty deed is done, he could then focus on getting the less indebted company back on a growth path.
The risk in such a strategy, of course, is that Musk would succeed in talking the company down [we'll be coming back to why this isn't really a case of talking a company down later -- MP], but not in talking it back up, leaving his stake in the company worth little to nothing. As Talley put it to me: “To hit the right window on this you need to create a temporary degree of acid indigestion on the part of your creditors, take advantage of that, and hope that the pyrotechnics that you set off don’t ignite the whole company and cause it to lose all its value.”
This is a horrendously complicated deal and unfortunately Joseph is our finance guy, but the Fast Company article by Allan Sloan which Coy cited has a good overview.
Now, to some math. Even though $44 billion is the number you usually see for how much Musk and his coinvestors paid for Twitter, that doesn’t include $2.5 billion of deal-related costs.That makes the total cost $46.5 billion.
If you subtract the $13 billion that Musk had Twitter borrow to help pay for the takeover, it means Musk and his coinvestors paid a combined $33.5 billion for their stock in X. Subtract the $7.14 billion that his coinvestors paid, and you see that Musk paid about $26.36 billion. Apply a 64.7% loss to that, and—voila!—Musk is down a bit more than $17 billion.
What value is Musk placing on the company? According to a story broken by Fortune, the restricted stock units that Musk is offering to some employees value X’s stock at $19 billion.
The big question is whether that $19 billion is above and beyond the $13 billion of debt on the company. Neither the company nor Musk will say. But based on my years of parsing corporate finances, my bet is that the $19 billion is above and beyond the debt. This would value the company at $32 billion, down substantially from the original $46.5 billion.
By contrast, the value that Fidelity is placing on its funds’ holdings of X place the value of the equity at $11.8 billion: 35.3% of the $33.5 billion that Musk and his coinvestors put into the takeover. That would value the company at a bit less than $25 billion.
This article came out a month ago, before Musk endorsed the "Jews will not replace us" conspiracy theory...
... then told his largest advertisers to "go fuck yourself. ... Go. Fuck.
Yourself." Valuation of a non-publicly traded company is tricky, but
there is little doubt that Twitter is worth far less than it was when
Sloan did his analysis.
Even if Musk could manage to get out from under that $13 billion, his vulpine craziness will still leave him billions in the hole from his original investment, but past that there is the underlying absurdity of describing this as talking the company down. There are certainly situations where savvy CEOs might want to lower people's perceptions of their companies' prospects and profitability, possibly even going so far as to reduce those profits for awhile, but what's happening here is closer to this exchange from an old issue of Mad:
"Then I'll convince him he's killing me."
"How?"
"By dying."
While Musk has floated some ideas about moving from the ad-based model, they have been too unworkable or inchoate (or, impressively, in some cases both) to treat seriously. Twitter is and will remain an advertising dependent social network for the foreseeable future. As such, its viability relies on its brand and reputation and on its relationship with advertisers and content providers. Not only has the foundation of the company been undermined, perhaps irredeemably by Musk, but the source of the damage is the public face of the company and there is virtually no chance of him being removed.
Coy and Talley do acknowledge how unlikely their scenario is, but the very fact that they feel the need to waste their time and ours, not to mention a chunk of valuable NYT real estate on this is a reminder of just how reluctant the establishment press is to acknowledge the obvious when it comes to Elon Musk and the larger category of tech messiahs.
As you dig into the Silicon Valley/VC story, it becomes more and more clear that while you can find brilliant minds and true visionaries, the majority aren't exceptionally bright or insightful. Convincing ourselves that these people are all geniuses and thought leaders, treating every buzz-word laden utterance as a profundity, credulously accepting every incredible claim has proven a costly mistake.
Particularly when you're dealing with a self-mythologizing narcissist.
p.s. This just in:
NEW via @claireatki: Sources close to X are telling me that there’s been a wave of resignations from Linda Yaccarino’s sales team..The flood of resignations from some senior and some junior ad staff came after X distributed November bonus checks. One of the people exiting was in the midst of content deals aimed at growing X’s presence in the media world.One person said there are barely any staff working at the X office beyond CEO Yaccarino, top aide Joe Benarroch and Carrie Stimmel, global agency leader.“It’s been miserable and losing money,” said one person familiar with conversations with the team.
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