Elon Musk bought Twitter using a leveraged buyout: He paid with borrowed money. : The Indicator from Planet Money Elon Musk bought Twitter for $44 billion, but almost a third of it was in loans—and Twitter's on the hook to pay them back. This strategy, popular in the '80s, is called a leveraged buyout.

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How Elon bought Twitter with other people's money

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SYLVIE DOUGLIS, BYLINE: NPR.

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WAILIN WONG, HOST:

A month ago, Elon Musk finally took ownership of Twitter. Maybe it feels way longer than that to you.

DARIAN WOODS, HOST:

It feels a lot longer than that, Wailin.

WONG: We've all aged a hundred years.

WOODS: Yes.

WONG: But actually, it's only been one month since he posted a video of himself walking into Twitter headquarters carrying a sink.

WOODS: I remember that. I mean, it's a type of humor. But that Twitter buyout wasn't even all his own money.

WONG: I doubt he even spent his own money on the sink because - you know what? - super wealthy people like Elon, they don't spend their own cash on stuff. They use something known in the world of corporate finance as OPM.

WOODS: That's a technical term?

WONG: That's right. It stands for other people's money. It's actually the title of a 1991 movie starring Danny DeVito.

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DANNY DEVITO: (As Lawrence Garfield) I love money. I love money more than I love the things it can buy.

WONG: In the movie, Danny DeVito plays a greedy corporate raider.

WOODS: And he's playing with a Slinky as well.

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DEVITO: (As Lawrence Garfield) There's only one thing I like better - other people's money.

WOODS: He knows how to turn a phrase. And in the real-life case of Twitter, the other people involved in the deal included big investment banks. These investment banks put up around $13 billion. It was in the hopes that that would turn into a lot more money down the road. But that payoff may not be coming.

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WOODS: This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.

WONG: And I'm Wailin Wong. Today on the show, we jump into this pile of other people's money to see how Elon Musk financed the buyout of Twitter and why the deal is looking like a bad bet for the banks, for Twitter and maybe for Elon, too.

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WONG: 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.

WOODS: Carl Tack is a former lawyer and investment banker. He's now an adjunct professor of finance at the College of William & Mary. We caught him up on the landline to have him explain leveraged buyouts to us.

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CARL TACK: Hello?

WONG: Can you hear me OK?

TACK: Absolutely. So old technology comes through.

WONG: 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.

WOODS: 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 do this. Like, why would it 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.

TACK: The end result is that that loan is a loan not to Elon Musk; it's a loan to Twitter.

WONG: Leveraged buyouts like this one came about after the deregulation of the financial system in the 1980s. Carl says that during this heyday, investment firms looked for companies that were mature, stable and generated a lot of cash. Then the firm, either through cost cutting or improving operations, would try to get even more money out of the company.

WOODS: That cash would be used to pay back the borrowed money. And if everything went according to plan, the investment firm would be the proud owner of a rock-solid company with a lot of cash and no debt.

TACK: If we bought a business for a hundred, even if the value of that business doesn't change, we now have something worth a hundred that's debt free. And by the way, we're going to try and make it worth more than a hundred. So the return on the equity, if it works, can be very, very high.

WONG: So that's a typical leveraged buyout. And Elon Musk used this kind of deal when he acquired Twitter for $44 billion. But 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.

WOODS: Another way that a lot of leveraged buyouts are different from this Twitter deal is the nature of Twitter itself. Remember when Carl Tack said that the typical leveraged buyout candidate is a stable, mature company generating lots of cash? Well, Twitter is 16 years old, but it's not exactly mature and stable. It hasn't made an annual profit since 2019. And its revenues depend on online advertising, which, lately, has been pulling back. It's a volatile industry.

WONG: Now Twitter owes $13 billion to the banks who financed the deal. 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.

TACK: Plan A was to - you know, Elon buys the business, and we offload the debt, and we all make a lot of money. That's Plan A.

WOODS: All right. So Plan A implies a Plan B, which, I think, is where we're heading.

WONG: Stay tuned.

WOODS: That was all back in April. And of course, Elon spent the next six months criticizing Twitter. He was threatening to back out of the deal. He was fighting the company in court. But, you know, he did go through with this buyout, and that kicked off the chaos that we're seeing in the last month with these mass layoffs and the fleeing advertisers. And just this week, Elon picked a fight with Apple. He was saying the company had mostly stopped advertising on Twitter.

WONG: Tim Cook, by the way, did not take the bait - not that I've seen so far. But this possible loss of advertising revenue from Apple and others could seriously hurt Twitter's ability to keep up with its debt payments. That's one part of Plan A that's looking kind of shaky.

WOODS: And as for the layoffs, well, cost cutting is typically pretty common in these kind of buyouts. In fact, investment firms have acquired this kind of nasty reputation for gutting companies when they take over, like laying off workers and selling off assets.

WONG: But Carl says firing half of the company's employees within the first couple of weeks, like Elon did at Twitter, that's not trimming fat; that's cutting into vital organs. So that's another part of Plan A gone sideways.

WOODS: Then there's the $13 billion in financing, which is now sitting on the books of these investment banks. Under Plan A, these loans would be sold off to other investors. But between when the banks committed the money and when Elon actually took over Twitter, financial markets took a turn for the worse. Investors got skittish. And now the banks can't find buyers for this debt. These banks are stuck with the loans on their books. And in corporate finance terms, this is known as a hung deal or a hung bridge.

TACK: Nobody wants the hung bridge. But the worst is not a hung bridge; it's a bridge to nowhere.

WONG: A bridge to nowhere because it's unclear whether Elon is now on Plan B, C, XYZ or if there's any plan at all for Twitter. The banks might not get all of their money back.

TACK: If Elon Musk came in and made some changes and the advertisers said, this is great, and users piled in and the market was just bad, well, that's a hung bridge. We're going to wait until the market clears up, but then, we're going to be able to sell it. The problem here is not just that the bond market is bad; it's that Elon Musk has torched the company.

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.

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WONG: This episode was produced by Nicky Ouellet with engineering from James Willetts. Sierra Juarez checked the facts. Our senior producer is Viet Le. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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