Planet Money's 'The Indicator': How Musk bought Twitter with other people's money
A MARTÍNEZ, HOST:
Elon Musk may be the richest person in the world, but he only used some of his cash to buy Twitter for 44 billion bucks. A third of it was borrowed from banks. As Wailin Wong and Darian Woods of our daily economic podcast explain, it's actually Twitter, not Musk, who's on the hook for those loans.
WAILIN WONG, BYLINE: When Elon Musk acquired Twitter, he used a kind of deal that was really popular in the 1980s - the leveraged buyout. This is typically where an investment firm acquires a company using borrowed money, other people's money. That borrowed money is the leverage. What makes a leveraged buyout unique is who ends up on the hook for the borrowed money. Now, the money typically comes from banks, but it's not the investment firm that borrows the money; it's the company getting acquired.
DARIAN WOODS, BYLINE: I mean, this is such a mind-bender. Like, the company is taking on debt so that itself can get bought. And you might wonder why a company would agree to a leveraged buyout. Well, sometimes, it's an exit strategy, you know, for the company's owners or the company's shareholders. And in Twitter's case, Elon was offering a price well above where the company's shares were trading at the time. Carl Tack is a former lawyer and investment banker. He's now an adjunct professor of finance at the College of William & Mary.
CARL TACK: The end result is that that loan is a loan not to Elon Musk; it's a loan to Twitter.
WONG: So there are lots of ways the Twitter deal didn't resemble a typical leveraged buyout. Take, for example, who's doing the acquiring. There's no investment firm involved, just Elon. He and some co-investors put up their own money for most of the 44 billion. The remaining amount, 13 billion, was borrowed from a group of banks. That's the money Twitter is now on the hook for. And Carl says the company's yearly interest payments could go up by almost a billion dollars. Twitter is going to need a lot of cash to make those payments.
TACK: I'm not privy to the business plan that he showed the banks, but I'm sure they convinced themselves that there was enough cash flow here to at least pay interest on this debt for a while. And they were willing to make a bet that Elon Musk was going to, you know, substantially improve the profitability and increase the value of this business. I don't know how they feel about it today, but that was a bet they were willing to take at the time.
WOODS: There was another bet that the banks made when they provided the $13 billion in financing, and that's that they'll be able to offload the debt. And that's another part of leveraged buyouts. The investment banks that make the loans don't want to keep the loans on their books. They want to sell it to other investors.
WONG: So to sum up, here was the plan going into the takeover. Elon turns Twitter into a moneymaking machine. The banks that provided the financing sell those loans to other investors. And everyone sails into the sunset on their luxury yachts. But this Plan A is looking kind of shaky right now. This past month, we've seen fleeing advertisers and mass layoffs. Carl says the layoffs aren't just the fat trimming we typically see in those buyouts, but it's actually cutting into vital organs.
WOODS: Despite this ongoing mayhem at Twitter, Carl says the company probably has a few years before it runs into any real trouble paying back the $13 billion. And if that happens, Twitter could try to refinance its debt.
WONG: Elon has already talked about bankruptcy. If that were to happen, the banks could go after Twitter's assets, not Elon's, because, remember, he's not the one who borrowed the money. Twitter did. He could, however, lose the 20-some billion dollars of his own money that he put into the deal.
WOODS: Darian Woods.
WONG: Wailin Wong, NPR News.
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