It turns out Elon Musk’s “first and final” offer for Twitter (TWTR) was the best exit the company’s board of directors could realistically imagine. They practically jumped to take the cash.
If you bought TWTR well below $50, you’re probably cheering along with fans of the free speech Musk wants to support on the platform. But elsewhere in Silicon Valley, the parameters around this exit are profoundly disturbing.
After all, taking TWTR out at $54.20 looks pretty generous when you consider that this was barely a $30 stock a few months ago. Down there in the doldrums, the bid came as a relief.
But people who have been watching TWTR longer than a couple of months know that unless something has gone seriously wrong inside the company, $54.20 is practically an insult.
TWTR got to $54 on its own a year and a half ago. While it’s been a bumpy ride, it stayed above $60 most of last year . . . and as recently as October, you couldn’t score a single share bidding below $68.
Selling out at $54 and cheering about it reveals that the board thinks they’ll never see those prices again, or at least not for years to come. It’s the kind of move you make when you’re trying to unload a deeply distressed asset and praying that someone will take the problem off your hands.
There are reasons to think TWTR peaked and is now on the way down. The audience has stagnated, monetization remains sluggish at best and unlike rivals like Meta (FB) there aren’t a lot of great ideas about expanding the platform into new businesses.
When this deal closes (and it probably will), Elon Musk inherits those problems. That’s all right. This is his toy now and as long as he enjoys playing with it, it’s his.
For other technology investors, taking TWTR private at this level creates another, subtler problem. The world’s richest man committed roughly 10% of his fortune and took on another $20 billion in debt to buy this toy.
This is as expansive as buyout bids get. There’s no apparent “strategic” or synergistic benefit to bolting a messaging platform onto an electric car company. Elon simply wanted it and he got it.
But that blue-sky windfall scenario still translates into 8.5X trailing revenue. That’s what an offer that practically bends business logic represents.
A month ago, I would say it was far from the ceiling on exit valuations, provided the money, the strategic fit and the willpower all came to the table. In theory, visionary deal makers can pay a lot more than a 8.5X revenue multiple for the perfect opportunity.
And in theory, confident managers are free to demand a lot more than that . . . or else they’ll go their own way and build enterprise value while they wait for a better offer.
What actually happened here is that the TWTR board took a hard look at their company, thought about their shareholders and decided 8.5X was as good as it is going to get. They concluded that shareholders just aren’t going to be able to demand more than 8.5X revenue for the foreseeable future.
We might see soon that TWTR is deteriorating a lot faster than Wall Street currently suspects. Even in that scenario, the richest man in the world won’t pay past 8.5X. Likewise, if TWTR is doing well, the ceiling is set at 8.5X now.
That’s a problem for every stock that currently commands a higher revenue multiple . . . or needs to achieve that valuation in order to shake off the current market funk and get back to work. And we aren’t just looking at niche companies here.
Microsoft (MSFT) has dropped 16% YTD and still trades at 11.9X trailing revenue. Admittedly, a dividend and raw scale deserve a significant premium price, but TWTR math still suggests that this trillion-dollar behemoth has gotten ahead of itself.
If Elon could swing the financing, his 8.5X pie-in-the-sky limit implies a takeout below $200 on mighty MSFT. Do you think that’s really the best exit here, the highest price you’ll ever get?
I don’t think so, myself, but as long as Wall Street has that 8.5X ceiling on its radar, the comparisons will remain persistent and unflattering. Revenue might come up 20% in the coming year . . . and MSFT will remain a prisoner of its own success, unable to justify substantial upside.
A lot of gigantic stocks are in a similar position. NVIDIA (NVDA) is trading well above 20X trailing revenue. Four months ago, that now-precarious multiple was a lot higher.
Now it’s deflating fast. Dollar for dollar, NVDA as a dynamic and innovative enterprise still looks expensive compared to what Elon paid for a toy. As nebulous as its outlook might be, the “toy” presents better investor value than mighty NVDA.
Visa (V) and MasterCard (MA) make the list of stocks trading above “the Twitter limit.” So does Eli Lilly (LLY), as well as a fleet of bulge-bracket technology names like Texas Instruments (TXN), AMD (AMD) and most of the software group.
If Elon Musk woke up and decided he wanted an accounting platform as a plaything, maybe he’d offer 8.5X revenue for Intuit (INTU). His first and final offer in that scenario would be around $300 . . . 30% below where the stock trades nervously today.
Maybe he’d want a graphics platform as well. Adobe (ADBE) under his terms would only be worth $275 on a generous day.
This is not flattering math. Management teams and oversight boards that have faith in their ability to create enterprise value and grow their companies would scoff at these kinds of vulture bids.
They aren’t TWTR. But by breaking ranks and admitting that they’re out of ideas, the Twitter board has made it harder for everyone else to argue that they’re worth more. Why would a private equity company pay a higher multiple for a serious investment than a rich man will pay for a toy?
And here’s the thing. Tesla (TSLA) itself is trading at 16X trailing sales. If the positions were reversed and Jack Dorsey was the richest man in the world, Musk math suggests that he might cough up $475 a share for the car company.
People are paying twice as much for Elon’s biggest brainchild as the Twitter board was willing to accept as their exit. He has ambition and confidence. They don’t.