MASTER OF FINANCIAL ECONOMICS

Department of Economics, University of Colombo

CASE STUDY

Exhibit 1: A timeline of Elon Musk's Tumultuous Twitter Acquisition – ABC News (Nov 12, 2022)

Elon Musk, the CEO of Tesla and the richest person in the world, said he wanted to own one of the
most popular social media platforms - until he said he didn't. In early October, he reversed course again,
and on Oct. 28, he finally completed the deal to acquire Twitter at his original offer price of $54.20 a
share at a total cost of roughly $44 billion.

Below is a timeline of Musk's bid to acquire the social media platform, a monthslong saga that began
in January when Musk started investing in the company:

Late January – Musk begins investing in Twitter, according to information filed with SEC in April.

March 14 – Musk's stake in Twitter reaches 9.2%, making him the largest shareholder in the company.

April 4 – In a regulatory filing, Musk discloses his stake in Twitter. Twitter shares rise more than 27%
on the announcement.

April 14 – Musk offers to buy Twitter at $54.20 per share, valuing the company at $44 billion. The
offer is a 38% premium to the closing price a day before Musk's investment in Twitter became public.

April 15 – Twitter adopts a poison pill provision to prevent the Musk acquisition and announces that
the poison pill will be triggered if any individual or entity acquires at least 15% of the company's shares.

April 21 – Musk says he has garnered commitments of about $46.5 billion in financing for a possible
Twitter acquisition.

April 25 – Twitter accepts Musk's offer to acquire the company and values the deal at $44 billion.

May 13 – Musk tweets that the Twitter deal is "temporarily on hold," citing concern over what he says
is the prevalence of fake accounts on the platform.

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July 8 – Musk moves to terminate his acquisition of Twitter, pointing to the issue of fake accounts.

July 12 – Twitter sues Musk to force him to complete the deal.

Oct. 4 – Musk proposes the completion of a deal to acquire Twitter at his original offer price of $54.20
a share at a total cost of roughly $44 billion, reversing a monthslong effort to terminate the agreement.

Oct. 28 – Musk closes a deal to acquire Twitter. Some of Twitter's top executives are fired, including
CEO Parag Agrawal, CFO Ned Segal.

Oct. 28 – Documents filed with the SEC for the shares to be delisted from the New York stock exchange,
as its new owner wants to take the company private.

Nov. 8 – Twitter delisted from New York Stock Exchange.

Exhibit 2: Is Twitter Really Worth $44.0 Billion Dollars? – [Link] (May 19, 2022) & [Link]
A. Elon Musk appears to have gotten cold feet about buying Twitter. However, whether or not Musk
tries to back out of the deal, there is still the question as to what Twitter is worth given its tepid
financial performance and the recent market downturn, particularly with technology stocks.
B. Twitter hired Goldman Sachs (GS) and J.P. Morgan Securities (JPM), which both delivered written
opinions to the Twitter Board on April 25, 2022 that the merger was fair based on the deal value of
$44.0 billion offered by Musk.
C. For its part, J.P. Morgan conducted the following analyses in coming up with its fairness opinion.
D. Illustrative Discounted Cash Flow Analysis: Free Cash Flows to the firm from 2022-2027 was
estimated using management forecasts and discounted back to present value as at December, 31
2021 using a range of discount rates of 10 – 12% reflecting estimates of Twitter’s cost of capital.
To this, a terminal value was calculated using a perpetual growth rate range of 5.6% to 9.0%. After
adjustments, this resulted in a present value per share of $39.10 to $60.90/share; quite a large range.
E. JPM also looked at public trading multiples for Alphabet (Google), Meta (Facebook), Pinterest,
Snap which it judged to be comparable to the business of Twitter.
F. Goldman Sachs did similar analyses and came to similar conclusions.
G. Management is forecasting $1.6 billion in EBITDA for 2022, rising to $5.4 billion by 2027. Revenue
is forecasted to more than double from $5.9 billion in 2022 to $12.9 billion within the same period.

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Exhibit 3: Twitter's Board of Directors Adopts a Poison Pill – [Link] (April 19, 2022)

A. Twitter adopted “Limited Duration Shareholder Rights Plan” (often called a poison pill), a day
after Musk offered to buy its remaining shares for $54.20 per share, for a total of over $44 billion.
B. Under the poison pill, if a shareholder acquires 15% of Twitter’s outstanding common stock without
the board’s approval, the other shareholders will be allowed to purchase additional shares at a
considerable discount. The plan is set to expire on April 14, 2023. This kind of tactic is a common
way to thwart off a hostile takeover attempt, but how exactly does it work?
C. In adopting a poison pill, the board issues a purchase right for each share outstanding. In Twitter’s
case, the right is only exercisable upon the bidder acquiring shares in excess of 15%. Once exercised,
the right allows all shareholders except the bidder to purchase shares at a considerable discount of
$210 in lieu of receiving securities worth $420 (i.e. a discount of 50%).
D. For example, if a bidder acquires 15% of Twitter’s shares at $ x per share, the pill is triggered and
the rights are exercisable, which entitles all shareholders except the bidder, to buy “$420 / $x” new
shares upon paying a total price of $ 210 for every “$420 / $x” new shares issued and purchased.

Exhibit 4: Hedge Funds Are Short on the EV (Electric Vehicle) Giant Tesla and Long on Twitter
– [Link] (Oct 12, 2022)

A. Given the funding dynamics around Elon Musk’s Twitter takeover gambit, it is hardly a surprise
that a number of hedge funds are trying to exploit this opportunity by shorting Tesla shares and
going long on Twitter; especially as Twitter shares are currently 8% below the $54.20 offer price.

B. On October 04th, Elon Musk, the CEO of Tesla, announced his willingness to adhere to the original
Twitter takeover terms, including the previously agreed upon purchase price of $54.20 per share.

C. This delay will allow Musk to try to secure the requisite $13 billion in debt financing for the $44
billion deal. However, he also needs to secure $24.51 billion in equity financing.

D. In April-May, Musk sold around $8.5 billion worth of Tesla shares to fund his original Twitter
takeover deal. Then, in August, he again sold $6.9 billion worth of Tesla shares indicating that he
has so far accumulated $15.4 billion in funding by selling a portion of his Tesla stake.

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E. Musk has also secured $7.1 billion in equity commitments from the likes of Larry Ellison, Binance,
Sequoia, the Saudi Prince Al Waleed, etc. However, this still leaves a $2 billion deficit.

F. Given these funding dynamics, it is quite likely that Musk will have to sell more Tesla shares worth
billions of dollars to secure the requisite funds to close the Twitter takeover deal. Hence, the
arbitrage play by hedge funds of going long on Twitter while shorting Tesla is entirely reasonable.

Exhibit 5: Musk’s Debt Financing

Exhibit 5.1: Musk’s Debt Bankers Would Avoid Steep Losses If Deal Falls Apart –
[Link] (July 11, 2022)

A. Credit markets have tumbled since banks first agreed to finance the $13 billion Twitter deal in April.
The riskiest piece of the debt package alone would have caused losses exceeding $300 million at
current market levels, according to Bloomberg calculations.
B. When banks commit buyout debt, they provide temporary financing that’s replaced by high-yield
bonds and leveraged loans.
C. Elon Musk’s Twitter financing package - one of the largest in recent history - includes $6.5 billion
of leveraged loans, $3 billion of unsecured junk bonds and $3 billion of secured junk bonds.
D. Banks had promised Musk that the riskiest Twitter buyout debt ($3 billion of unsecured bonds rated
CCC) would cost no more than 11.75%. This is comparatively cheaper to the market average of
15.04% on comparably-rated bonds, although still up from 9.9% when the deal was first announced.
E. At a fixed 11.75% coupon, and assuming an eight-year maturity, banks selling the unsecured bonds
today would have to offer a discounted price of about 85 cents on the dollar (i.e. 85 cents per $1.00
Face Value), resulting in a loss of more than $300 million, net of the underwriting fees that banks
would typically earn for selling unsecured debt.
F. Underwriting losses may be partly offset for at least some banks in the seven-bank loan syndicate -
Morgan Stanley, Bank of America Corp., and Barclays Plc - which would be expected to receive
fees for providing M&A advisory services to Musk.

…………………………………………………

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Exhibit 5.2: Banks That Helped Finance Musk’s Twitter Purchase Field Low Bids for Debt –
[Link] (November 11, 2022)

A. Musk paid $44 billion to buy Twitter. But it wasn’t all his money. He borrowed $13 billion of it and
banks that lent him the money are now trying to offload those loans. But they have reportedly
received quotes for as little as 60 cents on the dollar (i.e. Price of 60 cents per $1.00 Face Value).

B. It’s pretty standard for a bank to sell off loans it made to help buy a company. But what’s unusual
about this deal are the sharply lower prices those potential buyers are bidding. 60 cents on the dollar?
That’s not the norm, said Matteo Arena, finance professor at Marquette University. “Usually you
see discounts, you know, 90 cents on a dollar, maybe 85 cents on a dollar”.

C. Arena said those potential buyers — the hedge funds and private investors — are worried. What if
Twitter’s advertising revenues dry up? What if Twitter goes bankrupt? “If the company goes
bankrupt, how much of the money we are lending will we be able to get back in court? These kinds
of questions are on the table because of what’s been happening at Twitter lately”.

Exhibit 6: How Elon Musk Could Put More Crypto into Twitter – Bloomberg (October 30, 2022)
A. After months of dramatic back-and-forth, Elon Musk has taken control of Twitter Inc., igniting
speculation on how the billionaire will put his stamp on the social-media platform.

B. Crypto Twitter is no exception. Binance Holdings Ltd., the world’s largest digital-asset exchange,
committed $500 million to Musk’s financing for the deal in May and is reportedly building a team
focused on exploring how crypto could be useful to the social media company.

C. Bots and spam on Twitter are huge pain points for Musk, and helped spark a contentious legal battle
that put his acquisition of the company in jeopardy. Some digital-asset enthusiasts believe that using
blockchain could help reduce bots on Twitter. A blockchain-based identity verification tool could
promote Musk’s goal of wanting to “authenticate all real humans” on Twitter.

D. Musk could potentially implement a token-based voting system that allows users to have more say
over what happens on Twitter. Those values align with those of many crypto believers dedicated to
the ethos of decentralization promoted by blockchain. They think that a single entity shouldn’t make
major decisions over how a platform is managed.

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Exhibit 7: Elon Musk’s Take-Private Twitter Deal Is Different Than Most Private Equity
Buyouts, Here’s How – Washington Post (Nov 12, 2022)

A. Elon Musk’s $44 billion planned takeover and take-private of Twitter is similar to a PE Buyout;
however, it differs from most in several important respects.
B. Musk’s proposed purchase would be the fourth-largest deal in which a public company was bought
and taken private. Musk is playing the role of the private equity firm in this buyout. He’s on the
hook to provide about $33.5 billion in equity, of the total $44.0 billion in financing, with the
remainder coming from a debt package provided by big Wall Street banks.
C. A group of 19 investors agreed to cover another $7.1 billion of Musk’s $33.5 billion share. About
$5.2 billion is from 18 equity partners including billionaire Larry Ellison; of the other $1.9 billion
will be from Saudi Prince Alwaleed bin Talal Al Saud rolling over his current Twitter stake.
D. Musk is worth more than $200 billion, according to the Bloomberg Billionaires Index, but most of
that is not liquid. To raise more cash to fund his equity commitment, he could sell assets, including
more Tesla shares. He could also find more equity partners.

Exhibit 8: Twitter options trades ahead of Musk disclosure raise analysts' eyebrows – [Link]
(April 04, 2022)

A. On Monday, April 4th, Musk revealed a 9.2% stake in Twitter, making him the biggest shareholder
in the company, and triggering a 27% rise in Twitter's shares to over $49. Some well-timed trades
in the options on Twitter in the days before are raising eyebrows among options analysts.
B. A flurry of bullish activity followed Twitter's options in recent days with noticeably large trading
on Call options betting on Twitter shares rising above $43 by April 29, up by more than 10%.
C. The trades stood out since they were betting on Twitter to advance sharply within a relatively short
time frame, said Joe Kunkle, founder of options analytics firm [Link]. "It certainly
seems someone was aware of Musk building a stake".
D. For example, someone bought 3,900 contracts ⴕ of the 29-April $43 calls for $530,400, just minutes
before the end of the trading session on Thursday. According to Trade Alert data, 21,706 of these
contracts changed hands that day, making them the fourth-largest block of open contracts on Twitter.
E. The contracts would also capture any share price moves following Twitter's earnings results,
expected on April 28.

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F. With Twitter's share price jumping on Monday, the trades stood to make big gains. For example,
the 29-April $43 calls, which traded at an average price of $1.26 on Thursday, changed hands at an
average price of $6.92 by Monday, a gain of more than 400%, according to Reuters.
G. Bullish options on Twitter have drawn unusually heavy activity ever since Musk tweeted on March
25th that he was giving "serious thought" to building a new social media platform, while questioning
Twitter's commitment to free speech.
H. "I find it interesting that the calls were bought in a big hurry, late in the day ahead of the end of the
quarter. If I was a regulator, I would be looking into these trades. It's not a smoking gun, but it
deserves scrutiny," said Steve Sosnick, chief strategist at Interactive Brokers".
I. The SEC did not immediately respond to a request for comment on the trading in Twitter's options.
Twitter and Tesla did not immediately respond to a request for comment on the trading activity.

ⴕ
Each contract represents 100 shares. All options prices are quoted per one underlying share.

Exhibit 9: Elon Musk recommends owning homes and stocks when inflation is high - Business
Insider (Mar 19, 2022)

A. On Sunday, Tesla CEO Musk tweeted that: “Elon Musk @elonmusk: As a general principle, it is
generally better to own physical things like a home or stock in companies you think make good
products, than dollars when inflation is high.”
B. The Tesla CEO shared his advice just days after US inflation hit a 40-year high of 7.9% in February.
C. Gold and silver also generally do well, and there are signs both metals could gain in coming years,
according to David Morrison, senior market analyst at Trade Nation. But finding a way to invest is
not straightforward.
D. Wedbush Securities' Jazmin Carpenter believes Treasury Inflation-Protected Securities (TIPS) are
another good bet. “The worth of these bonds rises with inflation and decreases with deflation. Like
conventional Treasuries, they are backed by the US government, but they are structured differently”.

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 FORMULA SHEET

The security Market Line: E(ri) = rf + i[E(rm) – rf]

Present value of an Annuity:

Future Value of an Annuity:

Bond Price: P = [C { 1 – (1+ i)-n}/i ]+ [FV / (i+i)n]

Price of a discounted security: P = FV/(1 + r×d1/d2) where d2 = 360,364,365,366 etc.

No Growth Dividend Discount Model: Vn = Dn/k

Constant Growth Dividend Discount Model: Vn = Dn+1/(k-g) where Dn+1 = Dn(1+-g)

Growth Rate of Dividends: g = ROE × b

Present Value of Growth Opportunities: PVGO = V0 – E1/k

Price Earnings multiple: P/E = (1-b)/[k – (ROE × b)] or P/E = (1/k)[1+ {PVGO/ (E 1/k)}]

Free Cash Flows to Firm: FCFF = EBIT – Cash Tax + Depreciation – CapEx – Increases in NWC

Free Cash Flows to Equity: FCFE = FCFF – interest expense (1-Tax) + increases in net debt

Value of Firm Equity = PV of FCFF – Existing market value of Debt

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