Elon Musk bets the farm: How the billionaire’s Twitter buy could blow back on Tesla

Musk is leveraging Tesla stock for his Twitter purchase, making the companies odd bedfellows.

Elon Musk may be the world’s richest man, but that doesn’t mean he has a lot of money.

With much of his wealth tied up in stock holdings, he’s financing his $44 billion purchase of Twitter in part by borrowing against his shares in Tesla — tying the fortunes of the carmaker, the main source of his wealth, to those of the volatile and barely profitable social media site.

Success would make the richest man who has ever lived richer still. Failure could increase the amount of Tesla stock he is leveraging, creating problems for both Musk and the car company. Despite Musk’s optimism, others have tried and failed to raise Twitter’s profits to match its outsized influence.

“For a variety of reasons, Musk’s ownership of Twitter poses the risk of being a significant risk to Tesla,” said Howard Fischer, a former senior trial counsel at the Securities and Exchange Commission and a partner at law firm Moses & Singer.

The Tesla financing

Paperwork that Musk filed with the SEC last month outlined his plan to buy Twitter using $21 billion of his own money, plus $25.5 billion in loans — nearly half through a $12.5 billion personal loan issued against Musk’s Tesla holdings. (The value of the stock offered as collateral is roughly five times that of the loan amount.)

“Musk’s various statements about lowering head counts and not caring about advertising likely mean significant turmoil at least in the near future at Twitter, likely leading to lower earnings,” said Fischer. “The market is likely to react to these facts by assuming that Musk will have to sell shares of Tesla, or pledge more shares to secure his financing, which will put significant downward pressure on Tesla stock.”

This would turn the two companies into odd bedfellows, where Twitter’s performance, or lack thereof, might influence Tesla’s stock price. While other billionaires have bought media companies — Jeff Bezos famously snapped up the Washington Post — those purchases generally haven’t posed a risk to those buyers’ core businesses, such as Amazon for Bezos.

It’s complicated

Tim Galpin, a senior lecturer at the Saïd Business School at the University of Oxford, was more skeptical of the notion that the deal would directly link the two companies.

“They are two different companies with different business models,” he said. “The only obvious ‘link’ between the two is the potential reputational impact of Musk.”

The relationship between the companies is much more tenuous, Brian Quinn, an associate professor at Boston College Law School, said, and it comes to down to Musk’s ability — or inability — to pay interest on his personal loan.

“Interest can come either from dividends he is able to pull out of Twitter or by sales of the collateral,” Quinn said. “If Musk is unable to generate sufficient cash from Twitter to pay the interest on the margin loans, then Musk will have to generate the cash from somewhere else to do that. If he’s a forced seller of Tesla stock, then that might drag the Tesla stock price a bit.” Similarly, while Musk has already sold some Tesla stock to come up with $21 billion in cash for the Twitter deal, he’ll likely have to sell more or secure the money through margins on his Tesla holdings, Quinn added.

“In general, if Twitter is doing poorly, that will likely drag Tesla stock, but not too much since there are limits on Musk’s ultimate liability with reference to Twitter,” Quinn said.

That raises questions about what Tesla’s board is doing, if anything, to brace the company against shocks from Musk’s Twitter deal, Fischer said. He’s skeptical that Musk’s ownership of Twitter could help Tesla — and ticked off many instances where it would likely pose significant risks.

“What if statements on Twitter anger China, will China limit Tesla sales in that market?” said Fischer. “Just look at China’s reaction to the NBA after criticisms of China by some NBA employees. If Tesla faces downward share price pressures because of Musk’s ownership of Twitter, I can see significant liability for Tesla’s board based on lawsuits by unhappy investors.”

Musk refuses to holster his Twitter fingers

With closure of the purchase still months away by most estimates, there also are several ways the deal could fall apart. One of the unique provisions in Musk’s contract to purchase Twitter is that it bars him from tweeting anything that “disparage[s] the Company or any of its Representatives.”

“By any fair reading of the deal, he has probably violated those specific anti-disparagement terms,” said Fischer. “I also believe that it’s not going to make a difference and that they are not going to use this as a reason for the sale not to go through.”

Quinn said that it’s unlikely that Twitter will try to enforce the nondisparagement clause, however.

“Nothing’s going to come of that, because really the only thing that Twitter can do is sue for breach of contract,” said Quinn, who focuses on focuses on corporate law, mergers and acquisitions, the structuring of transactions, transactional law, and private ordering. “They’re not going to walk away from the deal because he may have breached this particular provision.”

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