The Financing Behind Musk's Bid​

By Jake Rickman​

What do you need to know this week?

In a move that has surprised much of the market, Twitter’s board of directors agreed to recommend Elon Musk’s takeover offer of $43bn to shareholders.

This marks a big turnaround from our reporting last week when Twitter’s board seemed poised to launch a “poison pill” defence strategy to fend off the Tesla co-founder’s bid.

The next step will be for Twitter’s shareholders to vote on the takeover.

Tesla’s shares have fallen nearly 10% since yesterday’s announcement, a drop that wiped out $100bn in market value.

Why is this important for your interviews?

If Musk finalises the acquisition, this would be one of the biggest corporate takeovers in history. If you are interested in corporate finance, you can demonstrate to interviewers your understanding of how the financing of the deal is to be structured.

In effect, Musk is offering each shareholder $54.20 per share. The board, which under company law must exercise good faith when evaluating the merit of a takeover offer, likely concluded that the deal was compelling.

But how does Musk intend to pay for this?

Though it may surprise some, the world’s richest man does not have $43bn in cash sitting around. He has sought the advice of the American investment bank Morgan Stanley, which last week released a preliminary financing proposal.

Most takeover deals are funded by a mix of debt and equity because debt maximises shareholder returns and lowers the short-term risk for the company acquiring the target. In this case, an overwhelming amount of the financing will come from equity — $21bn of which Musk is now legally committed to supplying himself.

It is not clear where all this equity cash will come from. Musk may look to private equity houses to partner with him for at least a portion of the equity, which will make them shareholders alongside Musk. He may also sell shares in Tesla to raise the cash.

As for the debt, $12.5bn — nearly half of the debt — comes from a “margin loan” to Musk from a consortium of banks including Morgan Stanley and Bank of America. The loan is secured against a substantial portion of Musk’s shares in Tesla. This means that if Musk later defaults, the banks are entitled to take ownership of these shares.

The other half consists of a mixture of old-fashioned bank loans and “bridge loans”, which are short-term loans supplied at higher interest rates that will be the first to be paid back.

How is this topic relevant to law firms?

The deal has not finished. It will not close for another few months at the earliest, and there are many legal and regulatory hurdles Musk and Twitter must clear before then. Advising Musk is Skadden, which has long had a reputation for advising bidders in corporate takeovers.

Twitter's board is advised by Simpson Thacher & Bartlett, while Wilson Sonsini Goodrich & Rosati is serving as Twitter's outside counsel.


Image Credit: KLYONA / Shutterstock.com

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