Plain English with Derek Thompson - Instant Reaction Pod! Elon Musk Offers to Buy 100 Percent of Twitter.

Episode Date: April 14, 2022

Well, that escalated quickly. Days after Elon Musk become the single largest individual shareholder of Twitter, he has offered to buy the company and take it private. Wait, what? Derek welcomes Stratechery writer Ben Thompson (no relation) to break down the news. Ben explains why Twitter is one of the most important companies in the world, why it's so undervalued, and what Musk could do with it privately. Then we make some predictions. Host: Derek Thompson Guest: Ben Thompson Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

This is Dave Chang and Chris Ying. We are the hosts of Recipe Club. You may have listened to it before, but we are now back on the air, new and improved, with the same host that lose every week. I still don't know what the rules are because they've changed as well. Chris, can you give a quick rundown? Every week, we debate the best way to cook the things you want to eat. We take a user, listener submitted recipe, and we all cook it with our friends,

Priya Krishna, Rachel Kong, Brian Ford, and John DeBerry. and then we talk about what went right and what went wrong. No, I actually really don't want to do this podcast. And they are hardly our friends. They are enemies. They are enemies. It's Dave's civil disobedience. If you want to see Dave Chang in an act of civil disobedience,

tune in to Recipe Club where he will not follow the recipe. I'm contractually obligated to make this podcast. But I'm here to have a good time. So listen to Recipe Club every week on the Ringer Podcast Network. So this just happened. Elon Musk has offered to buy 100% of Twitter and take the company private. This is a special emergency episode, and to break down the crazy news, I am thrilled to welcome Ben Thompson, no relation, the great tech writer and author of the must-read Stratechoree newsletter. But first, a brief history of how we got here.

So last week, if you can remember back that far, Elon Musk, the CEO of Tesla, CEO of SpaceX, world's richest. Human announced that he bought a bunch of stock in Twitter, so much stock, in fact, that he had become the largest individual shareholder of Twitter with just over 9% of the company. Twitter made it known that he would be joining the board of directors, and this wasn't like some kind capitulation. This was an attempt to rein in the famously unrainable Musk.

If Musk had joined the board of directors, he would have had to agree not to buy up more shares to the company. And his fiduciary duties would theoretically keep him from, you know, firing off a barrage of embarrassing tweets about Twitter. Soon thereafter, as we reviewed in a previous episode, Musk fired off a bunch of embarrassing tweets about Twitter. He pointed out that none of Twitter's biggest accounts like Justin Bieber do much tweeting, which is true.

He asked, is Twitter dying, which I think is not true. And he wrote that Twitter's headquarters are empty and ought to be converted into a homeless shelter. On Sunday, five days ago, Kragh Agrawal, the CEO of Twitter, announced surprise that the guy tweeting about how Twitter was dying was, in fact, not very interested in joining the board of the public company. So what was Musk interested in? Well, now we know the answer.

Buying the whole damn company. Late Wednesday night or early Thursday morning, Musk offered to buy Twitter and to take it private saying he believes the company needs to be transformed entirely. In an SEC filing, Musk offered just over a. $43 billion for the company. By the way, his net worth is just over $200 billion. That offer is a 38% premium over the closing price on April 1st before Musk started this shopping spree. It is a huge premium for anybody who is holding this stock, say, at the end of March. Musk called his cash offer, his best and final offer, and the share price he offered was $54.20. $54.20. Yes, Elon Musk managed to slip a little 420 reference into this offer.

In a letter to Twitter, Musk wrote, quote, I invested in Twitter as I believe in its potential to be the platform for free speech around the globe. However, since making my investment, I now realize the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company. And a quote. The reaction on Twitter, I would characterize a strange blend of delight and horror. Delight at all this delicious chaos and minor horror about what a transformed Twitter will look like in the future.

And that is the history. Now let's talk about the news. I'm Derek Thompson. This is plain English. Ben Thompson, welcome to the podcast. Happy to be here. Thank you, Smith, for joining me on very, very late notice. First, I have a couple

very specific questions about what Elon Musk might be up to and how his acquisition of Twitter could change Twitter. But first, your immediate reactions to the news that he has now officially bid to buy the company and take it private. I think my exact words were, holy smokes,

which I put on Twitter appropriately enough. But I'm not hugely surprised. I mean, I'm surprised, broadly speaking. If you asked me, you know, two weeks ago, would I be surprised? I'd be very surprised. Am I surprised in the context of what has happened over those two weeks? No, I'm not super surprised. I think there are a lot of signals here that this might happen.

I think that frankly, I mean, it's quite interesting because I think Musk is quite right on a couple of points. One, Twitter would do very well as a private company. Their current model doesn't work. It's a poor business. I have a hard time seeing them ever reaching the valuation that Musk offered, to be honest. And part of it is just like it's this advertising model on a platform that doesn't lend itself very well to advertising. And it's a model

where people are, they're intense, they're reading in. It's not a lean back experience where you're just sort of like on a Facebook or an Instagram, you're scrolling through, and there's some ads, and your whole sort of posture in how you consume it is very different as well as a Twitter, which is very textual. That's why Twitter is a smaller

audience. It's like a small, like it's people like you and I, right? We're super textual. We're want to inhale information, just like, give me more, more, more, give me an IV. And that's not a great sort of environment to, like, be sucked in by ads, right? It's just, and Twitter has always struggled. The only ads that work are sort of just broad, like brand ads, like the sort of direct response ads that Facebook specializes in where, oh, we'll get this sweater, oh, I kind of want that sweater, oh, look at this belt, whatever might be, have never worked. And I think they should lean much more heavily into more subscription type of products. But all these sort of shifts

are going to be very hard to do in the public markets. And so from a business perspective, it actually makes a lot of sense, number one. Number two, the, you know, to the extent that I think must rhetoric around free speech are legitimate, and he put it in his offer letter, so it sounds pretty legitimate. He's going to face real obstacles within Twitter.

Like, that's from everything I understand about Twitter internally. That's, they're not receptive to that. And so given those two factors, I'm not surprised this happened. It was also sort of foreshadowed, right? When he didn't take the board seat, didn't take the restriction on his ownership, and when the CEO of Twitter is like, there's going to be distractions ahead. Well, here you go. Here's your distraction.

So sorry, that was a long, drawn-out answer, but there's a lot of interesting pieces going on here. Yeah, there's at least two pieces that I want to nibble on a little bit. It seems like you're analyzing this from a pure business perspective, and I think that's important, and also from a cultural perspective, which is how a lot of people on Twitter, Twitter are reacting? How is this going to change the culture in which I marinate informationally every single day? I think you had one of the great initial observation when Elon first dipped his toe in the water, which is that there's always been this fascinating disconnect between Twitter's value as a business, about $30 billion and its impact on the world, which is massive. It feels

like orders of magnitude higher than its market cap. No, I think Twitter is the most impactful product in the world. I really do. Wow. And the reason is because, you know, it used to be in sort of the analog era, the sort of head of the food food chain was the New York Times, right? The New York Times, they talk about you write that, then we had the evening news, then we'd be in every newspaper in the country the next day, and it sort of set the agenda for the country and broadly for the world. We have a situation here where the New York Times and everything else is downstream from Twitter.

Stuff happens on Twitter. And Twitter is not just where stuff happens. And it happens, again, at the head of the media ecosystem. That's why even though Twitter, a small portion of the population is on it, what happens on Twitter affects everyone via the media. But it also has this effect where Twitter, because everyone's on it, whether it be sort of academics or whether it be like journalists or those are the sort of the heavy audience out there, lots of people in tech, it has this sort of harmonizing effect where people sort of move in unison in these different directions. you get these sort of mass sort of movements. And so you have things, whether it be this wave of support for the Ukraine war. And this is not a commentary where that supports right or wrong, but the dramatic shifts we saw in

Europe, for example, or the way that people, you like, this, nothing like that has happened previously. Like Switzerland gave up neutrality, right? Like, like that, like, it's, it was because of the popular fervor. And this starts and is congealed and sort of, not congealed, harmonized, sort of on Twitter in a very sort of powerful way because of this spread of information, the fact everyone's on there.

And it just goes back to COVID. Like, why has the response to COVID perhaps not been in line with the relative severity of COVID, which is, you know, I saw some study yesterday, the Spanish food was 50 to 500 times worse, right? But the response to COVID was why. Well, I think it happened in the era of Twitter. You go back to summer of 2020. I think, and I think, like, these are sort of ground.

shaking impacts that start there. And so the impact is absolutely tremendous. But again, it's a crappy business. There's not that many people on there. Its impact is because it sits at the top of the food chain. And so there is this big disconnect where, you know, in this distance always existed to a degree, like billionaires would buy newspapers for a reason. And we've seen that because the, you know, but, but it's even magnified even more so in the case of Twitter. Yeah, you said so much there that I think is so interesting. You know, Cass Sunstein has pointed to this idea he calls group polarization, which is the idea that if you take a bunch of people that have an opinion on anything,

you know, it could be climate change, could be COVID, could be, you know, whether or not Janus deserves MVP. And you put them in a room together, their views will radicalize. Because simply by being around people who seem to share the same. views, it will discourage the softer views and it'll encourage people to speak up more strongly. And Twitter is just this extraordinary bonfire of group polarization. It's this petri dish of micro-revolutions, whether you're talking about epidemiology and pandemics or what people should think about Ukraine or what people should think about Donald

Trump or AOC. And you see this over and over again. And I totally agree with you that for good and for ill, and we're not going to do a hold diatribe on catching out how Twitter is good. This is an analysis. Nothing normative here. It's just extraordinary the degree to which you see this group polarization, these micro-revolutions on Twitter. And I think you're right that for that reason, it might be one of, if not the most important, player in the entire information space. I want to go back to the business. You mentioned that Twitter is not like television. It is not a lean-back experience where you just sort of sit in the couch and

lie back and let the ads for F-150s wash over your face. It's a lean-forward textual experience. It's almost like an academic journal, which doesn't have a lot of glossy ads in it, you know? And I think that's really interesting. So what is Elon, do you think, going to do on the, what might he want to do on the business side? Because Twitter will always be this lean-forward experience,

which means it's not ideal for supplementing with advertising revenue. But at the same time, turning it into a pure subscription business is going to cut against its role as a digital public square of sorts. So what plays are available for him to raise the market cap of this company that you and I agree is severely underpriced relative to its cultural impact? I mean, it's a good question. I do think the, I mean, Musk has made comments in line with other comments that I think Jack Dorsey has made about this idea of they're being Twitter to the service and then lots of manifestations of that service. And so this is a way around like, well, some people,

don't want to see this up on Twitter. Some people want to see this stuff. Well, what if there's multiple clients, multiple ways to sort of consume Twitter, where Twitter actually backs into being more of a protocol, and there's different ways to experience it. And so that's number one. There's all this data on Twitter. Like Twitter sort of gives its data away to Google. They do have monetization agreements with different things where you can buy the Twitter feed and just consume the data and, you know, harvest insights. I think there's a lot more potential there. And I think there's an aspect where I think the description business has been underrated. I mean, I wrote an article advocating for that and a lot of pushback, which is very fair and very right, is that, well, you know, people aren't going to pay for this, right?

And if you, and if you charge a price for it or that it's going to sort of, you know, reduce the impact because no one's, you know, no one's going to pay. But you think about it, Twitter's irreplaceable, right? I mean, you and I can sit here and talk about all the problems with Twitter. and meanwhile, as soon as we're finished, we're going to both get back on Twitter and start like information again. There's nothing like it in the world. I agree.

I saw all these people online who were, look, they were definitely left of centers, left of center to far left to center, who said if Elon Musk buys Twitter, I am leaving Twitter. And I was like, are you though? Are you really? I don't think you are.

You're as addicted to this thing as I am. And also, for people that are in the media space, it's not just an addiction. It's not just alcohol. It is a newspaper. If you curate your Twitter list, it is an extraordinary tool for understanding the world and being fed information from corners you never would have looked for. Like, I've compared it before online to a library with a food fight in the basement. Like you walk into the library and you want to like go up the floors and learn about the world.

But people get stuck in the foyer. They get stuck in the basement. People are throwing tomatoes and pizza. And they're like, oh, that's fun. I'll throw tomatoes and pizza. But if you can find your way beyond that foyer into the elevators and go up into the library stacks, It is an unbelievable resource of knowledge. And people like you and me are just in the business of accumulating knowledge as so many others are.

So I can't imagine people leaving there. There's a lot of interesting ideas you could do too. I mean, like imagine if you start out for free and the price you pay for Twitter increases the more followers you have, right? Are you going to walk away? Like I have 230,000 followers, whatever. I'm going to walk away from the? No, of course not. Right.

It's priceless. And it's not affordable. It's not like substack where you can take. your email list and take it over to Ghost. You can't take your Twitter followers and move them to, I don't know, Instagram. And we see this with the, we see this with people on the right trying to start their own Twitter clones, right? Like completely dead in the water. And because you like the network effect is a real, it's a powerful thing. And also people want the food fight, right? No one actually wants to hang out on a network that's only their side. They want to,

like part of the whole point is to be there and interact with the other side and pretend like you're actually really mad about it when actually it's all you want to do all day all day. I mean, there's a lot of sort of revealed preference on Twitter that is very different than when people say, their actions belie something different. And so, I mean, but again, all this sort of stuff, you're not going to pull it off as a public company. And again, I'm not sure this is the driving force for Elon Musk. I mean, again, because of this disconnect, you have a situation where someone can use a fraction of his net worth, you know, or, I mean, buying it is a larger fraction, but it's still a fraction of his net worth, you know, because he wants to. you know, having more free speech or whatever his agenda might be. But I actually do think there are, there are business possibilities here. And at the end of the day, one of the weird things they get about Elon Musk,

I was just in this chat group and someone's saying, about how much they hate him. And I'm like, what, like, at the end of the day, like Tesla is a remarkable accomplishment. Space X is a remarkable accomplishment. And by the way, one of the single most important strategic assets the U.S. has.

Like, he's single-handedly, has saved our rear end as far as like the future of military conflict and space and all these sorts of things. There's all this dual use implications of SpaceX that no one thinks about or talks about. And yeah, he's done some dumb stuff online on Twitter in particular and said some stupid stuff. But can we have like a weighing of the balance here of like what has been done and what hasn't? And yes, he got government contracts. Those are available to anyone. Like there's a there's a reason he's the one that actually pulled it off and other people didn't. But But for some reason, he's become this totem, particularly of being on like a right wing or something,

when his greatest accomplishment is starting a company that reduces greenhouse gases? I mean, it's very, it's very weird. He's a very Twitter sort of thing. He's a fascinating guy, and I agree. I think that, you know, doing the whole cultural equation is a little bit difficult because in the one hand, this is a genius who lapped NASA while on the side building the most valuable car company in the world. And also is a dick on Twitter.

Like all these things are true, and I think it's important to just like put them all out in the sentence. I will say, and this is a point that's been made on this podcast before, I think you might have made it too. I think Kevin Ruse was the one who brought it up on a previous episode. The fact that Elon Musk codes as conservative, or at least anti-liberal, is good for climate change because it codes his product as anti-liberal, which means that conservatives are more likely to buy electric F-150s, which is not something that was being talked about 15 years ago, when electric cars were for people in Berkeley with Birkenstocks. Yeah.

Tesla's great triumph is making electric cool. Like, and people forget, I mean, we're old enough to remember. This is a stunning transformation of the entire concept. Like, I mean, I mean, this is the musk in a nutshell, right? It's like if you index on the latest thing or the current thing, you're not going to touch that one. Right? But when you look at it in totality, it's, I don't know, it's a more complicated story for sure. All right. Very last question for you, and thank you so much for staying up late for doing this.

What's the most interesting thing about the SEC letter itself that Elon Musk sent, and what should it tell us about the next shoe to drop here? Oh, I mean, the most interesting thing is that Musk has, from the moment his share was announced, he had total control of Twitter. And the reason is because Twitter has, this huge jump in stock price that was predicated on Elon Musk only 9% of it. And the implicit threat that if he exited that position, one, that gain's going to go away. And two, it's actually probably going to go lower because it's not just that Musk leftist position. It's that he implied he doesn't have trust in management. Well, now it's explicit. He's like, Twitter is worth a lot.

It needs to be private. Management stinks. And he and he's, and he, and so he offered like a 20% premium over Twitter's price yesterday, which is a very small amount for a hostile takeover. But as he noted, that's actually a 54% premium over when he started buying and a 30-some percent premium of when he announced that he was a shareholder. And he said, like, under current management, it's not worth that much, so I'm going to sell. And so it's not just that he's offering, you know, Twitter's except this price. They have to realize if they turn it down, Twitter's stock price can be cut in half, if not more. And so he kind of has them, you know, I mean, honestly, from a fiscal financial perspective,

it's very hard for me to see why Twitter shouldn't accept this. This isn't a company that has great growth prospects. The stock's been flat for ages. I mean, but at the same time, Twitter does have poison pill provisions. He can't go in and get a new board elected. They can issue as much shares as they want to counterbalance his mission. And just very quickly, for those of us who aren't obsessed, with succession, what is a poison pill provision? How does that work?

There's, so there's lots of stuff you can put in your bylaws that basically make it very hard to do a hostile takeover. Like, like you could imagine most of the time that there be some situation where, you know, you just buy a bunch of shares and you put, or you make an offer and then you call a shareholder meeting and you say, put it to a vote. Sharrows should vote. Who gets to decide, you know, should we accept this offer or not? A poison pills make that impossible. So they can stop shareholders from calling shareholder meetings. Only the board can call a meeting. The board is not elected all at once. They're elected in different terms. You'd have to call multiple meetings and elect multiple board members. They can authorize blank check preferred stock, which basically means they can issue new stock that says, oh, this stock has preferred voting rights. So every stock is worth 100 votes compared to regular stock. They could give that stock to management and say, oh, now we all voted you. So it's basically impossible. And this is, sort of stuff that it's disclosed in their 10Ks because the reason they disclose it as a risk

factor is having these poison pills makes the company less valuable. Right. And it makes the company less valuable because for everything we're saying right now. Right. Elon Musk can't essentially apply his 54% premium to the company's value and help shareholders. That's so interesting. And it's a risk factor because now they can cover their end when they reject it and shareholders can't sue them because, hey, it was in the 10K. You knew this was a risk of buying Twitter stock. So tough luck. But if you're betting this, right, this podcast, unlike my bosses, is not sponsored by Fandul. But if you were, if you were doing the odds in Vegas, you're saying that the Musk's acquisition of Twitter now is the highest odds bet.

I don't know. I don't know. I mean, this literally just broke like an hour ago. I would guess that it probably, I'm going to say, does not happen, but I don't know. I really don't know. I'm being a terrible analyst here. I'm going to say it probably doesn't. I'm not at you being a good analyst by pointing out the fact that this is actually just extremely uncertain because the company's 10K makes these kind of acquisitions unlikely, but also you're looking at the richest man in the world who happens to. be very determined as evidenced by the fact that he napped NASA. There's also the fact that like Twitter's bored, despite they have this ass covering position,

does have a fiduciary duties to their stockholders. And it's hard for me to imagine a scenario where Twitter's stock price reaches this level anytime soon. And so maybe they just should do it. And the other reason why Musk has been effective gear is obviously Musk can just walk away. I mean, like, and he can walk away and he can sell his shares and he's not going to lose that much money because he bought the shares when they were cheap. And that is precisely why he has the board in a tough place. Because there's a term, Batna, best alternative to negotiated agreement.

Must Batna is very high. He can just walk away. And that's why he can, like, he leveraged them to this position. And they're going to have to make a choice. Ben Thompson, thank you so very much. I appreciate it. Take care, man. Good to talk.

Many thanks to Ben Thompson for popping on the podcast. There's two other issues that I want to flash. at the end of this emergency podcast episode, which is not or was not as formally structured as a typical episode is because this news was so late-breaking. Issue number one is exactly how Elon Musk will finance this acquisition. He doesn't have the cash,

literally like money in a checking account, cash, to make this deal. He would have to sell, stock. That stock would likely come out of his holdings of, say, Tesla and SpaceX, or it could come from co-financers. It's a big open question. What the acquisition of Twitter, if it comes to pass, would do to the public stock values of SpaceX or Tesla if its largest shareholder sells out of those positions, or who exactly would join Elon Musk to outright buy Twitter, even as Musk is making allusions to the fact that he might gut its business model, advertising,

in order to shift it toward what Ben was talking about, some combination of subscriptions and data services. The second issue, I think, it's going to be a really, really loud part of the conversation about Elon Musk, and I'm not exactly sure how I think about it yet, is what happens if the world's richest person becomes singularly in charge of the world's most important information platform? And that was Ben's, I think, entirely credible case. That in many ways, from a news discourse standpoint, Twitter is the most important

information platform in the world, even though that importance is not reflected in its market cab. What happens if the world's richest person is singularly in charge of that platform. I don't know, but you bet that we're going to have a reboot of Gilded Age-style conversations about exactly how much power is too much power for the world's richest people and how financial power cashes out as cultural and political power when they have this kind of influence over our news. So those are two issues. The financing question, think is up in the air. And the cultural question, which I think is going to be chewed on for as long as this

new story is in the cycle. That's all from us today. Thank you for listening.