Now that Elon Musk has shelled out $ 44 billion for Twitter control, it’s time to do some math to understand what it means to own the social network. The Tesla founder ‘s ability to make numbers work is essential to the health of a service called the world square. If you are in dire financial straits, it can be difficult to even pay the bills. Already the data is daunting. The transaction is the largest acquisition of a technology company ever by borrowing money. Musk has taken on a thirteen billion dollar debt to a company that has made no profit in eight of the past decade. The deal was signed before the global economy began to show signs of recession following rising interest rates. Additionally, online advertising, which accounts for 90 percent of Twitter’s revenue, is on the decline.
“Tech companies should have enough room for maneuver in their budgets to finance innovation,” says Drew Pascarella, a lecturer in finance at Cornell University in the United States. But this acquisition “eliminates any space”. In 2021, Twitter spent $ 50 million to pay interest expense. With the debt brought by the agreement, this figure will rise to one billion dollars a year. Sure, the company had $ 630 million in cash in the last fiscal year, but now that figure is less than that due to creditors. Furthermore, prior to the acquisition of Musk, Twitter had six billion dollars in cash, but it is likely that a significant portion of this money was used to close the deal.
To make ends meet, Musk is likely to drastically cut costs. Apparently, he started doing it by firing a lot of people. According to an investor who put less than $ 1 million into the deal, Musk plans to cut the social network’s 7,500 employees in half. The layoffs could target different areas of the company. Twitter spends $ 1.2 billion annually on sales and marketing, and much of that money is spent on staff costs. But Musk risks sending away employees who are difficult to replace due to the relationships built over the years with advertisers.
Another area in which to reduce costs could be dedicated to research and development, on which Twitter spends $ 1.2 billion annually. However, Musk said he has big plans for the social network, from fighting fake accounts to creating new ways to manage content. Developing these tools will require people who can do it, and the kind of engineers Musk said he wanted to hire are expensive.
There are other ways to cut costs. For example, by intervening on rents, data processing centers and other budget items, which collectively amount to more than a billion dollars a year. But they may be harder to get rid of quickly. In fact, unlike the traditional goals of debt acquisitions, Twitter doesn’t have specific sectors that could be eliminated or downsized. According to Eric Talley, a law professor at Columbia law school in the United States, “if cost cutting doesn’t help, Musk could be forced to raise more funding within a year.”
The entrepreneur has already contracted thirteen billion dollars in debts from external investors, while other lenders, such as the Sequoia Capital funds and Andreessen Horowitz, have injected seven billion dollars into the operation. Musk is personally responsible for the remaining twenty-four billion of the deal and it is unclear whether he has managed to bring together other investors to also lighten the burden of this part of the deal.
If Twitter needs more money, finding new supporters could be difficult due to the company’s finances. Even Musk admitted that the investors involved from the start were “obviously paying too much.” Given that Musk is credited with a net worth of two hundred billion dollars, in theory the entrepreneur could be able to cover Twitter’s liquidity needs or take over the shares of some lenders, reducing the company’s debt. Much of his wealth, however, is tied to Tesla, whose shares plummeted 40 percent this year. Also, putting money into an indebted, slow-growing company like Twitter isn’t the same as investing in a fast-growing startup like SpaceX, his aerospace company. The risks are greater in the case of Twitter, because the banks only care that they are paid interest on the due date. And, unlike a real estate company, for example, Twitter doesn’t have a lot of assets to offer as collateral to keep creditors good.
On the other hand, it has already happened in the past that Musk entered companies that many thought were destined for failure, proving that he was right. This is the case in the production of vehicles with an electric motor. Twitter comes from years of mismanagement, and it could be good for the social network to settle accounts away from the spotlight of the stock market. Musk could bring in new ideas and recruit engineers who may not have previously been willing to work for Twitter. Some experts, however, warn of the enthusiasm that initially prompted many investors to join the agreement: the fascination of technology visionaries, they warn, can fade depending on the fate of the markets, especially in light of current fears. for the world economy. Certain operations “work more easily in times of market growth,” says Robert Bruner, a professor at the University of Virginia’s Darden School of Business. According to the economist, the worst deals are usually struck when a market is at the height of its expansion, as in the case of Musk’s acquisition of Twitter. In the future, Musk would not be able to “lower costs to a level sufficient to cover the debts,” explains Bruner. This “would slowly erode the company’s net worth, and he wouldn’t be able to find other investors.” The final outcome? “The slow implosion of Twitter”. ◆ gim