Notice of termination of Twitter merger agreement
A thing I&#x27;m confused about here is how Twitter&#x27;s stock price is still US$35.04 in after-hours trading, amounting to a market cap of US$28.13B.  This valuation implies a time-discounted long-term expectation that Twitter will earn about US$1.4 billion per year, if we divide by a nominal P&#x2F;E ratio of 20 years.  Alternatively it represents about a 70% probability that Musk will acquire the company for the agreed-upon US$54.20 per share, or that some other similar acquisition will happen.<p>Twitter is a somewhat stagnant social networking service; it hasn&#x27;t been experiencing the meteoric growth of things like Instagram or TikTok.  Its yearly revenues are US$5.1B, but instead of earning US$1.4B per year, it&#x27;s losing US$220M per year, so it&#x27;s spending US$5.3B per year (on 229 million &quot;mDAUs&quot; (&quot;monetizable daily active users&quot;), so that&#x27;s US$23 per user per year).  I think most of its 7500 employees are high-paid tech employees, who cost maybe US$300k per year each—including benefits, remember, having an employee typically costs about twice their salary.  That works out to US$2.25B per year of employee-having costs, leaving about US$3.0B for everything else.<p>Large profit margins are common at social networking services; Meta makes US$39.37 billion of net income on US$117.929 billion of revenue, a 33% profit margin.<p>So, what&#x27;s Twitter&#x27;s path to earning US$1.4 billion per year?  Either it could increase its revenues by at least US$1.6 billion, for example by growing its user base by 40%, without increasing its expenses much; or it could decrease its expenses by at least US$1.6 billion, for example by laying off most of its employees, without reducing its revenues much.<p>A dramatic expansion of Twitter&#x27;s business in the next few years doesn&#x27;t seem likely to me; is that what investors are betting on?  Looking at <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;w&#x2F;index.php?title=Twitter&amp;oldid=793297389" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;w&#x2F;index.php?title=Twitter&amp;oldid=793...</a> they had 319 million active users in 02016, so the crudest approximation suggests that their yearly growth rate is -6.5% per year.  At that rate, growing their user base by the requisite 40% will take them another negative five years.  (More charitably, maybe they are in fact growing, but mDAUs are a small enough subset of what they were reporting as &quot;active users&quot; in 02016 that it more than makes up the difference—but their yearly growth rate still isn&#x27;t likely much more than +6.5%.)  Alternatively they could get better at squeezing money out of their existing users.  Or maybe they could buy another Vine and this time <i>not shut it down so that a Chinese clone becomes the hottest new social networking app</i>.  But that would require them to have money to fund the acquisition, and where is that going to come from?  Or are the founders of the hot new startup going to accept Twitter stock?<p>More plausible is a skeleton-crew Twitter with a 20% smaller userbase and US$4.2 billion of yearly revenue spending only US$2.8 billion—depending on what its actual expenses are.  But getting from here to there would be very traumatic and poses a substantial risk of total collapse, either because Twitter loses the institutional knowledge of how to keep the site running when it lays off most of its staff, or because their cuts send them into a death spiral where revenues decline even more than expenses.<p>It&#x27;s against this background that, somehow, Musk&#x27;s trolling with this merger termination has only dropped Twitter&#x27;s market cap by 4.8% today.<p>So, how are Twitter&#x27;s remaining investors justifying their US$28 billion bet on Twitter?  In this situation I can easily imagine Twitter being worth US$6B or maybe US$10B, but US$28B, the hell?<p>Are they figuring that there&#x27;s a 35% chance that a Delaware court will order specific performance of the Twitter acquisition (and that someone will lend Musk the money to go through with it, despite his best efforts to convince everyone that Twitter is a massive fraud?) and a 50% chance that, failing that, Twitter will successfully make the transition to a skeleton-crew shadow of its former self that nevertheless knocks out Facebook-like earnings every year?<p>Do they think Twitter&#x27;s management team will miraculously figure out how to leverage their evident ability to get a moronic clown elected President of the USA into actual profits?<p>Do they think another acquirer willing to pay a premium over today&#x27;s price will materialize, perhaps motivated by the prospect of political influence rather than selling colored water to the Twits, if that&#x27;s what Twitter users are called?<p>Here&#x27;s the most plausible hypothesis I&#x27;ve seen.  TSLA&#x27;s market cap is US$779.67B (<a href="https:&#x2F;&#x2F;www.google.com&#x2F;finance&#x2F;quote&#x2F;TSLA:NASDAQ?window=5Y" rel="nofollow">https:&#x2F;&#x2F;www.google.com&#x2F;finance&#x2F;quote&#x2F;TSLA:NASDAQ?window=5Y</a>), so the US$44B purchase price would be about 5.6% of TSLA&#x27;s outstanding stock, about 58 million shares.  The trading volume is 31 million shares per day, so Musk could presumably liquidate 58 million shares over the course of a few weeks without totally tanking the stock, and so could any potential lender who gave him a cash loan secured by that stock.  Musk&#x27;s net worth was reported as over US$300 billion in November (<a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Elon_Musk#Wealth" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Elon_Musk#Wealth</a>), three-quarters of which is Tesla stock and stock-price-related instruments such as purchase warrants.  Tesla has fallen 38% since then, so he must still have at least US$180 billion worth of TSLA.<p>So, the Twitter investors are betting that there&#x27;s an excellent chance that the court will in fact order specific performance and the deal will go through despite Musk&#x27;s most eloquent protests of fraud on the part of Twitter&#x27;s current management team.