Elon Musk is finally completed his $44 billion deal to take over Twitter and keep it private.
While most people are probably familiar with the idea of bring a private company to the stock exchange – the process by which individuals can buy and sell shares of a company in the stock market – the reverse process is not well understood and happens much less often.
Like a professor of business administration and lawI have been analyzing mergers, privatizations and other business deals for over two decades. The most common question I’ve gotten from students and faculty colleagues is why would Musk want to keep Twitter private? Or more simply, what does it mean to go private?
The answers to this question help tackle a more interesting one: will he succeed?
Public vs Private
Let’s start with the fundamental differences between a public and private company.
To start, a publicly traded company is widespread, which means it has many shareholders. Anyone can buy shares of most public companies, their shares are traded on 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 activities and financial condition in reports posted on the Security and Exchange Commission website. In short, everything that happens to a publicly traded company that is of interest to investors must be made public.
A private company, on the other hand is kept close. It has few shareholders, sometimes only one. It is usually impossible to buy shares of a private company. If possible, it is difficult because stocks are not traded on exchanges. You need to find someone who is willing and able under restrictive securities laws to sell you their shares.
In addition, a private company is not required to file any disclosures or anything else with the SEC.
Another important difference is the power that 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 about compensation.
Private companies have no meddling boards or rules about fees or other matters. And with little or no pesky outside shareholders, private company leaders don’t have to worry about the effect their decisions could have on the stock price.
Many, if not most, companies start life as a private business – perhaps in a family garage, if seems to be the case in so many startup origin stories.
As a young company grows, it needs more fundinga problem that is often solved by doing an IPO that brings in a lot of money and opens up the property to everyone.
Taking a company private, as Musk did, the IPO returns. The Tesla billionaire paid Twitter shareholders $54.20 per share, a 64% premium over the price Twitter shares traded a few weeks before Musk’s offer was announced on April 14, 2022.
A success story
So why would Musk or anyone else want to take a company private? An important reason is control, which allows a buyer to impose his or her vision and unique strategy.
Now that the shares have changed hands, Musk can do whatever he wants with them — from reopening .’s accounts former president Donald Trump and yes, the artist formally known as Kanye Westuntil cut the workforce and firing executives.
That’s why Michael Dell decided to take the computer company that bears his name privately in 2013.
At the time, the company had a hard time while sales of personal computers collapsed during the rise of the smartphone. As he explained in a securities filing:Dell found it essential to quickly transform the company from a PC maker to a company focused on providing and managing complete information technology systems for large organizations.
He said he couldn’t make the transformation as a publicly traded company because it would hurt short-term profits, likely causing the stock price to fall. That, in turn, could hurt Dell’s perception of Dell and lead to employee turnover.
In other words, Dell’s plan may have been too bold for a publicly traded company. But the strategy paid off — for him, his co-investors and his company.
Dell itself $750 million in cash chipped and more than $3 billion in the form of its 16% stake in the company, with approximately $3.4 billion coming from other investors and $16 billion in debt.
In 2018, when the company went public for the second time, stake was worth $32 billion, with similarly large payouts for its co-investors. The business also thrived, with sales and profits soaring after a period of low growth, as Dell predicted. The workforce often falls when a company goes private, but Dell’s was up 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. While e-commerce was still in its infancy, it started to disrupt brick-and-mortar retailers, increasing competition – especially in the children’s toy market. A plan to sell his wares online through Amazon fizzled, putting Toys R Us far behind in e-commerce. In the meantime, the shops were getting old and shabbycustomer service was lousy and Target and Walmart gained market share.
In 2005, two buyout firms and a real estate trust won the bid to take Toys R Us private at $6.6 billion, with $5 billion in debt. Unlike Dell, who knew his company coldly, Bain Capital, KKR & Co. and Vornado Realty Trust do not have much experience in the toy industry. And they followed a classic private equity strategy of consolidation, marginal store closures and cost savings.
Also unlike Dell, Toys R Us never recovered. The incurred significant debt in the buyout saddled the company with large interest payments that little money left to invest when remodeling stores or building a competitive online business. Toys R Us filed for bankruptcy in 201712 years after he went private.
The way I see it, Dell had a plan that suited his business environment—a key concept in the study of business strategy. The Toys R Us buyers didn’t.
Does Musk Have a Vision?
So what does all 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 shareholdersHe 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 freedom of expression is a societal necessity for a functioning democracy.” You might wonder whether that is a business model or a statement of socio-political philosophy.
Regardless, he said that as a publicly traded company, Twitter “cannot thrive or serve this societal need.” He also tweeted that he would fight bots on the social network, get Trump and others back to participate, and potentially allow users pay bills via tweet – part of being “Project X” super app idea.
More recently, The Washington Post reported that Musk has plans to cut Twitter’s 7,500 employees by about 75% — though on October 26 he told Twitter employees in San Francisco that he wouldn’t lose that many. He also promised Twitter would not turn into a “free for all hellscape.”
Musk understands the physics of launching rockets and the engineering behind building an electric car, but he has no deep experience running a social media platform or building super apps. I don’t think he has a well thought-out strategy to fit Twitter’s difficult environment.
What he does have is a huge debt. Last year, Twitter owed about $51 million in interest on its debt. After going private, estimates are that Twitter will owe at least a billion dollars annually on about $13 billion in new debt.
In 2021 the company generated only $630 million in cash from operations. That means Musk won’t have a lot of money to fund a super app or other big ideas unless he can attract additional investment into the company.
Of course, with the company in his hands, Musk can do whatever he wants. He can pursue any free speech policy that suits him. He can get Trump and Ye to tweet. He can ban Tesla short sellers and anyone who questions his demand 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 say whether taking Twitter private will be a Dell-esque success or a Toys R Us disaster. But seen Musk said he “don’t care about the economy” might not care.
This article has been updated to indicate that the deal has been completed.