“You only get one Alan Bond in your lifetime, and I’ve had mine.”
Kerry Packer knew a good deal when he saw one: $800 million cash to part with his beloved Channel Nine was an offer too good to refuse. Retrieving a 37% stake after converting $250 million in debt to equity was icing on the cake. It also underscored the difference between a shrewd businessman and a self-promoting spruiker.
Two generations later, another tycoon has splashed his cash to acquire a modern media outlet. And like Bond, he has overpaid for the privilege. He said so himself.
Elon Musk’s US$44 billion payment to buy Twitter makes Bond’s offer look like chump change. It ranks as the third largest completed technology transaction in history, behind the $182 billion AOL/Time Warner merger, and Dell’s $67 billion acquisition of data storage and management firm EMC.
Within weeks of his bid, Musk was attempting to scuttle the deal. Had he succeeded, he might have been on the hook for a $1 billion break fee, although he may have fought that in court for years. Instead, it was Twitter that took Musk to court to force him to pay up. The Delaware Court of Chancery agreed. Buyer’s remorse is no excuse to terminate a valid contract.
Musk has his work cut out. Twitter’s trailing 12 months (TTM) revenue was $5.2 billion. That makes the purchase multiple 8.5 times revenue. That’s revenue, not earnings. Once costs are deducted, Musk’s multiples look daunting.
In 2018 Twitter’s free cash flow, which reflects discretionary cash generated in excess of what’s required to maintain operations, peaked at $856 million from $3 billion revenue. In the four years since, the company boosted revenues more than 70%, but expenses rose even faster. TTM free cash flow was negative $853 million.
In other words Twitter is bleeding money, and that’s before another billion dollars a year in interest payments are incurred thanks to additional leverage to finance the deal.
In typical fashion, Musk believes he alone can fix it. He claims he will boost revenues fivefold to $26.4 billion by 2028. He has not explained how. At the same time, he plans wholesale job cuts to slash expenses. The firings have begun. It appears Musk is repeating his Tesla management playbook, whereby he stakes out stretch goals that seem unattainable and drives employees to exceed expectations.
It’s not clear this strategy will succeed at Twitter. For starters, unlike Tesla with its multiple income streams, Twitter generates 90% of revenue from a single source: advertising. Musk wants to diversify the business model to generate new sales lines.
One idea he floated this week to charge blue tick users a monthly $19.99 fee, then dropped to $8, demonstrated this will be easier said than done. He is also reported to be exploring options to resuscitate Vine, Twitter’s short-form video service that was shuttered in 2016. As the kids might say, that’s basic. YouTube’s Shorts and Meta’s Reels have pumped a fortune into this space already to take on TikTok. Twitter would be a minnow in this fight.
Also, corporate advertising remains a relationship-driven business. That extra $2 billion revenue growth over four years didn’t appear out of thin air. Sacking swathes of the workforce won’t magically enhance Twitter’s external partnerships. It won’t do much for morale either. Good luck hiring the best and the brightest to help overhaul the business with this approach.
As if that weren’t enough, advertisers have signalled their wariness to stick with the platform. Musk’s statement to them that he doesn’t want Twitter to become a “free-for-all hellscape” hasn’t assuaged their concerns. General Motors has suspended advertising while it monitors what happens next. IPG, a global advertising conglomerate, has warned clients to pause their spending.
Corporations don’t want their brands associated with a site that welcomes bigots under the rubric of “free speech”. Far-right activists have embraced Musk as their champion, and he has done little to dissuade them.
Since his takeover a flood of hostile and hateful messaging has deluged the platform, prompting many users to consider whether they will remain. He also restricted content moderation, limiting enforcement of Twitter’s protocols regarding online conduct. Musk won’t be able to have it both ways. If he allows hate speech to flourish, many users will leave. Since users are the product, advertisers will follow them out the door. Then he will be left with a diminished shell akin to other right-wing echo chambers such as Parler, Gab, and Truth Social.
And that’s before he decides whether to allow former US president Donald Trump to return.
All this would be enough to keep any Chief Twit busy. But Twitter isn’t the only ball in Musk’s court. He’s also the boss of Tesla. And SpaceX. And The Boring Company. And Neuralink. A reasonable person might conclude that either CEOs don’t matter much, or that Musk is overstretched.
His fans believe the hype about Musk. They regard him as a transformational leader who can defy gravity (literally with SpaceX) by sheer force of will. Nothing in his background indicates he has the experience and knowhow to reinvent a digital media business. He wouldn’t be the first magnate to blow his dough on a big-budget buy. Remember MySpace? Rupert Murdoch knows a thing or two about media companies, but even he discovered that social networks can be fickle.
Keep in mind the dirty secret of mergers and acquisitions: most deals destroy value for the acquirers. After the strategies and synergies and financial benefits are trumpeted, the hard work begins. That boils down to making the reality match the predictions. It’s harder than it looks. Of course, these transactions can be terrific for sellers. Hence Twitter shareholders’ enthusiasm to force the sale.
Whatever Musk’s plans for Twitter, there are no quick fixes. Bond was riding high in the 1980s, a perfect avatar for the times. At its zenith his corporate empire encompassed property, mining, brewing and media enterprises. He paid the highest price for a painting — Van Gogh’s Irises — in history. He owned mansions, luxury cars, boats and airships. He founded an eponymous university. He also won Australia’s adoration by snatching the America’s Cup from the New York Yacht Club. For a time he seemed unassailable. It didn’t last. There’s a lesson in his hubris for Musk.
