Valuation guru Aswath Damodaran says it’s ironic that the threat to Twitter has come from Elon Musk as he has arguably used the platform to greater effect than perhaps anyone else on it.
Damodaran believes what has made the whole saga more interesting is that it focuses on not only Musk and Twitter, but on broader issues of social and economic value of social media platforms, corporate governance, investing and how politics has become part of almost every discussion.
“There are some Twitter personalities who have more followers than Musk, but most of them are either inactive or tweet pablum, but Musk has made Twitter his vehicle for selling both his corporate vision and his products, while engaging in distractions that sometimes frustrate his shareholders. While he has made veiled promises of alternative platforms for expression, it was a surprise to most when he announced on April 4, 2022, that he had acquired a 9.2% stake in the company,” Damodaran wrote in his blog “Musings on Markets”.
Twitter’s performance over the years
Damodaran says in order to understand the maths behind Musk’s bid for Twitter, one has to also understand the company’s journey to its current situation.
He says Twitter, which was founded in 2006 by Jack Dorsey, Noah Glass, Biz Stone and Evan Williams succeeded greatly in attracting people to its platform, hitting 100 million users in 2012, and then doubling those numbers again by 2013, when it went public ,with an IPO.
“The offering price for Twitter’s shares was set at $26, by its bankers, and the stock debuted on November 7, 2013, at $45. In the weeks after, that momentum continued to carry the stock upwards, with the price reaching $73.31 by December 26, 2013,” he says.
But over the years since its IPO, Damodaran feels the Twitter story has taken an unexpected turn which none of its founders or its investors would have predicted.
Although it has performed better than expected on some parameters of user engagement and influence, it has lagged in the operating numbers measuring its success as a business.
“As Twitter’s user base and influence have grown, there has been one area where it has conspicuously failed, and that is on business metrics. The company’s revenues have come primarily from advertising (90%) and while these revenues have grown, they have not kept up with user engagement,” he says.
Damodaran says the market has responded accordingly to the disappointments on the operating metric front as Twitter’s stock price has dropped to below IPO levels in 2016 and its performance has lagged its social media counterparts.
The Twitter-Musk tussle
Damodaran says while Musk’s acquisition bid is not exactly conventional, it has initiated a completely predictable tussle between Twitter and Musk.
Unsurprisingly, Twitter’s initial response to Musk’s bid was that it was worth much more than Musk’s offering price, and that its shareholders would be receiving too little for their shares if they sold.
Musk countered this argument by stating that the market clearly did not believe that current management could deliver that higher value, and that he would be able to do a much better job with the platform.
According to Damodaran, although there is a possibility that Twitter’s value could be higher, it is not a particularly strong argument for the board to make, looking at the current scenarios.
What counter arguments can both competing parties offer
Damodaran says Twitter’s management is expected to claim that its platform has the potential to deliver significantly more value, either by changing the business model or fine tuning the advertising model.
He feels Musk will agree with the argument about Twitter’s untapped potential, but will claim that only he can make the changes to Twitter’s business model to deliver this potential.
“The problem that Twitter’s management will face in mounting a case that Twitter is worth more, if it is run differently, is that they have been the custodians of the company for the last decade, and have been unable or unwilling to deliver these changes. Shareholders in Twitter will welcome management’s willingness to consider alternative business models, but the timing makes it feel more like a deathbed conversion rather than a well thought through plan,” he says.
Musk’s true intentions
Damodaran believes it is difficult to predict right now what is going through Musk’s mind and what Musk will be doing, if he acquires Twitter as he also has a trillion dollar company to run in Tesla and a host of other ventures that he is part of.
“Musk’s unpredictability makes it difficult to judge what his endgame is, at least with Twitter, since he could do anything from selling his position tomorrow to bulldozing his way through a poison pill, taking Twitter down with him. The fact that Twitter’s stock price has stayed stubbornly below Musk’s offering price suggests that investors have their doubts about Musk’s true intentions, and whether this deal will go through,” he says.
Possible outcomes of Twitter-Musk saga
Damodaran says it can’t be denied that Musk has forced Twitter to act, and it is likely that the company that emerges from this episode will look different from the company that initially went into it. He sees 4 possible outcomes
Status Quo: Damodaran says it is possible that Twitter may prevent Musk’s takeover bid and that the poison pill adopted by the board will force him to walk away from the deal, leading to him selling his shares along the way.
Musk takes Twitter private: Damodaran says Musk has the ability to pull off the impossible which he has proved on many occasions so it won’t be a surprise if he is able to buy enough shares in a tender offer and/or convince other shareholders to put pressure on the board to remove the poison pill, and allow him to move forward with his plans.
Independent, but with corporate governance changes: Damodaran says even if Twitter is able to resist Musk’s entry, institutional investors are expected to push for change in the company, with new board members and perhaps even a new CEO.
“The way that the company’s management and board have handled the deal does not inspire confidence in their ability to run the company. In fact, having gone through five CEOs over Twitter’s life, it is worth asking the question whether the dysfunction at the company lies with the board, and not just with the CEO,” he says.
Someone else acquires Twitter: Damodaran says there is also a possibility that the board may be willing to sell the company to someone other than Musk, at a slightly higher price only to save their face.
Is the Twitter-Musk saga a political story?
Damodaran believes the Twitter-Musk saga at its core is a political story and not a financial one.
“As with most things political, you will provide an alternate, more reasoned, argument for why you are for or opposed, but you are deluding yourself, and hypocrisy is rampant on both sides.,” he says.
Damodaran says critics of Musk argue that Twitter needs to be preserved or at least protected from money digging billionaires and they should not control social media platforms but the same critics are not as upset about Jeff Bezos owning the Washington Post or a George Soros bid for Fox News.
“If it is Musk’s personality that you feel is what makes him an unsuitable owner, I wonder whether we should be requiring full personality tests of the owners of other media companies,” he says.
On the other hand, some people are in favor of the deal just because they want Twitter to be a bastion of free speech. but they must remember that every social media platform is involved in some degree of censoring, for legal reasons and self preservation.
“It should also be noted that while those disaffected with Twitter have attempted to build their own social media platforms, they still get far more mileage from their presence on Twitter than from their posts on alternate platforms, and the complaints about Twitter not being balanced seem to end up being on Twitter,” he says.
Damodaran concludes that while there are some who come to Twitter for news and witty banter, many come to the platform to witness, and sometimes take part in deranged arguments about trivial issues.
“Much as we like to complain about the ugliness and anger that we see on social media, it is exactly those forces that draw users to it, and arguing that Elon Musk will make it worse, misses the point that he symbolizes the strengths and weaknesses of the Twitter platform better than any other person walking the face of the earth,” he says.
(Disclaimer: This article is based on Aswath Damodaran’s article in his blog “Musings on Markets” )