WSJ reporter Alexander Saeedy dives into the financial chaos following Elon Musk's $44 billion Twitter purchase. He reveals how Musk borrowed $13 billion from banks and why that decision is now deemed one of the worst since the financial crisis. The conversation explores the banks' miscalculations, the financial turmoil with advertisers fleeing, and the staggering drop in Twitter's value from $44 billion to $19 billion. Saeedy also discusses the aftermath for banks like Barclays, facing significant losses and layoffs.
The banks underestimated the risks associated with lending Elon Musk money by failing to accurately evaluate Twitter's financial stability.
Musk's acquisition of Twitter showcased the dangers of relying on speculative investments, as banks faced significant losses amid declining ad revenues.
Deep dives
Elon Musk's Twitter Acquisition and the Debt Structure
Elon Musk's purchase of Twitter for approximately $44 billion was largely financed through $13 billion in loans from a consortium of banks, including major players like Morgan Stanley and Bank of America. The acquisition was attractive for these banks, not only because of the opportunity to work with the richest man in the world but also due to the potential for lucrative fees from Musk’s other ventures such as Tesla and SpaceX. Given Twitter's inconsistent profitability, the banks charged high interest rates on these loans, projecting an annual payment of over a billion dollars. Initially, the banks planned to quickly offload the debt to outside investors, a strategy they typically employed in high-return situations to mitigate long-term risk.
Decline in Twitter's Financial Health Post-Acquisition
Following Musk's acquisition, Twitter's financial condition rapidly deteriorated, leading to significant advertiser exodus that worsened the situation. High-profile advertisers like Audi and Pfizer withdrew their support, creating a perception that Twitter was unsafe for advertising, especially with some of Musk's controversial actions. As the company's revenues declined, this compounded the challenge of servicing the $13 billion debt, where Musk needed to find an additional billion and a half annually for bank payments. The banks had been expecting a quick return to profitability that never materialized, straining their financial forecasts and forcing them to rethink their strategies for managing the debt.
Impacts on Banks and Risk Evaluation Failures
The banks’ failure to transfer the loans to investors in a timely manner left them exposed to the ongoing struggles of Twitter, who’s market value plummeted below half of its purchase price. This situation required the banks to allocate more reserves against this risky debt, which had repercussions for their overall operations, including cuts in employee bonuses and staffing. The relationship benefits they anticipated from working with Musk didn't yield significant returns, as his other ventures did not require capital in the way they had hoped. Ultimately, this episode highlighted substantial failures in risk evaluation, as banks underestimated Musk's influence on Twitter's advertising relationships and the long-term viability of the financing deal.
When Elon Musk bought Twitter in 2022, he borrowed $13 billion dollars from several banks to complete the deal. Now, it looks like the banks may not get all their money back. WSJ’s Alexander Saeedy on what the banks didn’t take into account when they made those loans.
