Elon Musk finally finished its $44 billion deal to acquire Twitter and take it private.
Although most people are probably familiar with the idea of publicize a private company – the process that allows individuals to buy and sell a company’s stock on a stock exchange – the reverse process is less well understood and happens much less often.
Like a business and law professor, I have analyzed mergers, privatizations and other corporate deals for more than two decades. The most common question I’ve been asked by students and faculty colleagues is why would Musk want to make Twitter private? Or more simply, what does it mean to become private?
The answers to these questions lead to a more interesting one: will he succeed?
Public vs. private
Let’s start with the basic differences between a public and private company.
To start, a the public company is widely owned, which means it has a lot of shareholders. Anyone can buy shares of most public companies, their shares are traded on stock exchanges and their market price is widely available on websites and apps.
Federal securities law requires public companies to disclose a lot of information about their operations and their financial situation in reports published on the Security and Exchange Commission website. Basically, anything that happens to a public company that affects investors must be publicly disclosed.
A private company, on the other hand, is tightly held. It has few shareholders, sometimes just one. It is generally not possible to buy shares of a private company. When possible, it’s difficult because stocks don’t trade on an exchange. You need to find someone who is willing and able, under restrictive securities laws, to sell their stock to you.
Also, a private company is not required to file disclosures or anything else with the SEC.
Another key difference is the power the CEO has. While CEOs of public companies have a lot of power, that power is limited by things like a board of directors and rules on compensation.
Private companies do not have interfering boards or rules governing compensation or other matters. And with few or no pesky outside shareholders, private company executives needn’t worry about the effect their decisions might have on share price.
Many, if not most, businesses start life as a private enterprise – perhaps in a family garage, like seems to be the case in so many boot origin stories.
As a young company grows, it needs more fundinga problem often solved by making an initial public offering that brings in big bucks and opens up ownership to anyone.
Privatize a business, as Musk did, cancels the IPO. The Tesla billionaire paid Twitter shareholders $54.20 per share, a 64% premium to the price Twitter stock was trading at just weeks before Musk’s April 14, 2022 bid was disclosed.
A success story
So why would Musk or anyone else want to take a company private? An essential reason is control, which allows a buyer to impose his vision and his unique strategy.
Now that the shares have changed hands, Twitter is free for Musk to do whatever he wants – from reopening the accounts of former President Donald Trump and you, the artist officially known as Kanye Westat downsize and dismiss executives.
This is why Michael Dell decided to take the computer company that bears his private name in 2013.
At the time, the the company was in trouble as personal computer sales plummeted with the rise of the smartphone. As he explained in a securities filingDell believed it was essential to quickly transform the company from primarily a PC manufacturer to one focused on providing large organizations with complete computing systems and their management.
He said he could not complete the transformation as a public company because it would hurt short-term earnings, which would likely cause the stock price to fall. This, in turn, could harm consumers’ perception of Dell and lead to staff turnover.
In other words, Dell’s plan may have been too bold for a public company. But the strategy paid off – for him, his fellow investors and his company.
Dell itself $750 million in cash and more than $3 billion in the form of his 16% stake in the company, including about $3.4 billion from other investors and $16 billion in debt.
In 2018, when the company went public for the second time, Dell the stake was worth $32 billion, with similar payouts for its co-investors. The the business also prospered, with sales and profits booming after a period of weak growth, as Dell predicted. Staff numbers often decline when a company goes private, but Dell increased by about 50% in 2020 compared to 2013.
A classic failure
But it doesn’t always end well.
In the early 2000s, Toys R Us was in serious trouble. Although e-commerce was still in its infancy, it was beginning to disrupt physical retailers, growing competition – particularly in the market for children’s toys. A his plan to sell his wares online through Amazon failed, leaving Toys R Us far behind in e-commerce. Meanwhile, its stores were getting old and shabbycustomer service was poor, and Target and Walmart were gaining market share.
In 2005, two buyout companies and a real estate trust won the tender to privatize Toys R Us for $6.6 billion, using $5 billion in debt. Unlike Dell, which knew its business from cold, Bain Capital, KKR & Co. and Vornado Realty Trust didn’t have much experience in the toy industry. And they followed a classic private equity strategy consolidation, closure of marginal stores and cost reduction.
Unlike Dell, Toys R Us never recovered. The a large debt contracted in the takeover has burdened the company with large interest payments which left little money to invest in renovating stores or building a competitive online business. toys r us filed for bankruptcy in 201712 years after going private.
In my view, Dell had a plan suited to their business environment – a key concept in the study of business strategy. Toys R Us buyers did not.
Does Musk have a vision?
So what does all of this mean for Musk’s potential success on Twitter?
We still don’t know much about what he plans to do.
In his April letter to Twitter shareholders, he said, “I invested in Twitter because I believe in its potential to be the platform for free speech around the world, and I believe that free speech is a societal imperative for a functioning democracy.” One might wonder if this is a business model or a statement of socio-political philosophy.
Either way, he said Twitter could not “thrive or serve this societal imperative” as a public company. He also tweeted that he would fight bots on the social network, let Trump and others join, and potentially leave users pay bills via tweet – part of sound Great app idea “Project X”.
More recently, the Washington Post reported that Musk was planning to cut Twitter’s 7,500 employees by around 75% – although on October 26 he told Twitter employees in San Francisco that he wouldn’t get rid of it as much. He also promised Twitter would not turn into a “hellscape free for all”.
Musk understands the physics of rocket launching and the engineering behind building an electric car, but he doesn’t have deep experience running a social media platform or building awesome apps. I think he doesn’t have a well-thought-out strategy that matches Twitter’s tough environment.
What he has a huge debt. Last year, Twitter owed about $51 million in interest on its debt. After going private, estimates are that Twitter will be owes at least a billion dollars annually on approximately $13 billion in new debt.
In 2021, the the company only generated $630 million in operating cash. That means Musk won’t have a lot of money to fund a super app or any other great idea unless he’s able to attract additional investment into the company.
With the company in his hands, Musk can, of course, do whatever he wants. It can implement any freedom of expression policy that suits it. He can let Trump and Ye tweet. He can ban Tesla short sellers and anyone who questions his foreign policy initiatives. He can fire 75% of his staff in the blink of an eye – something a public CEO would have a hard time doing.
It’s too early to tell whether the privatization of Twitter will be a Dell success or a Toys R Us disaster. But given that Musk said he “doesn’t care about the economy”, maybe it doesn’t matter.
This article has been updated to indicate that the transaction has been completed.