The Journal. - Lending Elon Musk Money Was A Very Bad Bet

Episode Date: August 27, 2024

When Elon Musk bought Twitter in 2022, he borrowed $13 billion dollars from several banks to complete the deal. Now, it looks like the banks may not get all their money back. WSJ’s Alexander Saeedy on what the banks didn’t take into account when they made those loans. Further Reading: -Elon Musk’s Twitter Takeover Is Now the Worst Buyout for Banks Since the Financial Crisis  -Elon Musk’s Hard Turn to Politics, in 300,000 of His Own Words  Further Listening: -Elon Musk and Silicon Valley Turn Towards Trump -Tesla’s Multibillion-Dollar Pay Package for Elon Musk -Why Elon Musk’s Twitter Is Losing Advertisers  Learn more about your ad choices. Visit megaphone.fm/adchoices

My colleague Alexander Saidi covers banking and finance. And last week, he and I were talking. And what's one of your favorite things? Talking about Elon Musk's purchase of Twitter and the debt he borrowed to pay for it. Let's cast our minds back to 2022, when Elon Musk bought X, or Twitter, as it was called at the time. The drama began in April when Musk revealed he owned a big chunk of Twitter stock. Elon Musk has bought nearly 10 percent of Twitter for an investment of around $3 billion. Do you think that Elon Musk has greater plans to become a little bit more actively involved in Twitter? The world's richest man set off a firestorm by revealing his bid to buy Twitter for over $43 billion.

The deal is done. Twitter has been sold to Elon Musk. Musk paid $44 billion for Twitter. A lot of that money came from him, but not all of it. For much of the rest, he turned to a group of banks who provided loans to make the purchase. $13 billion worth. Two years later, Alex has been looking into what happened to that debt. What has your recent reporting revealed about Elon Musk's loans?

So the 13 billion that Elon Musk had ex-borrow to buy Twitter is now considered the worst deal in merger finance that banks have participated in since the 2008 to 2009 financial crisis. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbach. It's Tuesday, August 27th.

Coming up on the show, how financing Elon Musk's takeover of Twitter turned into one of the worst banking deals in history. I'm Scarlett Johansson. My family relied on public assistance to help provide meals for us. These meals help fuel my love for acting. When people are fed, futures are nourished. Join the movement to end hunger at feedingamerica.org slash act now. Brought to you by Feeding America and the Ad Council. To complete his purchase of Twitter, now X, Elon Musk needed $13 billion. In short order, a group of seven banks, including Morgan Stanley, Bank of America, and Barclays,

pulled together the loans. For these banks, this was a chance to get the richest man in the world as a client. The allure of banking Elon Musk, providing capital for him to buy a company, not only would reward them handsomely if things went according to plan, but it would also put them in the good graces of the world's richest person, who also controls a number of valuable companies that are capital intensive and need banks to help. By working with Musk to buy Twitter, these banks could heaven in to working

with his other companies like Tesla and SpaceX. The deal had some risks because Twitter wasn't always profitable. And to account for those risks, the banks charged a high interest rate on the loans. That meant Twitter would potentially pay the banks over a billion dollars a year in interest payments, according to the terms of the loan. But the banks also didn't think they would hang on to the loans for long. Their plan was to sell the loans to investors, investors like Fidelity and Vanguard, who would then get to collect those annual interest payments.

You know, there's a famous adage in the business, which is that banks are in the moving business, not the storage business. This is supposed to be another loan that they just moved. So banks really don't think of this risk as a long-term risk. It's really supposed to be a short-term risk. OK, so I'm Elon Musk, and I give an IOU to the bank. And then the bank takes that IOU and sells it to someone else. Exactly.

It's like a hot potato. I'm just like- Exactly, they're middlemen. They're middlemen. They're middlemen. And like all middlemen, they want to capture a little fee between the buyer and the seller,

the borrower and the lender. Why are these outside investors interested in buying this debt? Well, usually in instances of corporate takeovers, they are rewarded handsomely for doing so. So the appeal of making that much money has drawn investors into this market for a long time. The high returns they can generate for asset managers

who are investing pension money or endowment money is very appealing. And that's why they typically invest in deals like these. When it works well, it is a giant moneymaker. When it doesn't work well, it is a disaster. And in this case? You can certainly say things have not gone according to plan. The company's finances took a nosedive almost immediately after he bought it. It got so bad to the point where Musk said the company appeared to be near the verge of bankruptcy.

At the same time that the company took on 13 billion of debt, advertisers fled the company. They didn't want to advertise there anymore. Audi's leaving, GM is leaving, Pfizer is leaving, really big names are leaving. Advertising giant IPG has recommended to its clients, which include American Express, Coca-Cola, Johnson & Johnson and others, to temporarily pause advertising on Twitter.

He was just messing around, but Stephen King, the famed author of Michelle, tweeted, pretty soon they're gonna have nobody left. It didn't feel like it was a safe place to advertise because of some of the attitudes of its owner. So a lot of people pulled their money from the website at the same time that the company had to find an extra billion and a half every year to pay the banks.

So then the banks go to offload this debt to sell it on to investors. What happened? Well, that didn't even happen because Musk had days to close the deal. So, the banks didn't even have time to try and syndicate out the debt. But interest rates had risen so fast over the period of the summer that it was clear that the banks would have had to sell the loans at a steep discount and incur hundreds of millions of dollars of losses if they wanted to sell it. We reported that at the time. So instead, the banks decided, we're going to wait to sell.

They said we're going to wait it out, wait for the company's finances to be established under new ownership, take that story to investors and hopefully sell it in early 2023. And then that didn't happen. And now, in August of 2024, there still hasn't been a good time for the banks to sell the loans. Because X's business is still struggling. The company itself is worth less than half of what it was when Musk bought it, less than two years ago. WSJ's most recent reporting shows that the company was valued at around $19 billion. As of the end of last year, it was bought for $44 billion.

It's a pretty remarkable amount of value destruction in a short period of time. After the break, what all this value destruction has meant for the banks who loaned the company $13 billion. relied on public assistance to help provide meals for us. These meals help fuel my love for acting. When people are fed, futures are nourished. Join the movement to end hunger at feedingamerica.org slash act now. Brought to you by Feeding America and the Ad Council. Without investors buying the loans, the banks behind Musk's Twitter takeover were in a tough spot. The banks had to pony up the money to let Musk be able to buy the company.

But because they couldn't find enough investors who would be willing to pay the amount that they were asking, it stuck on their balance sheets. And it's been that way for almost two years now. So these banks went into this transaction thinking that they'd agree to a $13 billion loan, swiftly offload it to investors, make a bunch of money in the process. Correct. But that didn't happen. Right.

And we reported that they've written down the estimated value of the loans by hundreds of millions of dollars each because they don't necessarily think they're gonna get all their money back. And holding onto this debt has created other problems for the banks. That's because when banks have a lot of risky debt,

they're required by regulators to set aside funds in reserve in case those loans go bad. And, you know, we know that the regulators scrutinize bank balance sheets regularly, especially when there are high risk deals on their balance sheet. Regulators don't want banks to have a really risky debt on their balance sheet, whose value fluctuates a lot and, you know, might not be recovered.

So it's a real problem. You know, it's the losses are a problem. The scrutiny from regulators is certainly a problem for the banks. And as we report it out, it's had consequences even for staffing in the investment banks. When banks have to put more funds in reserve, it means there are less funds for other things, like employee bonuses. So we reported that at Barclays, top investment bankers on the mergers and acquisitions team were told at a New York dinner in early 2023 that compensation for everyone in the room at the dinner would be cut by at least 40% from the prior year.

The bank had several deals that were hurting its performance, but X was by far the largest. Once those bankers were paid their bonuses around the beginning of the year, around 50 of Barclays, one of the 200 managing directors left the firm. So it impacted sort of compensation, which made people want to leave. It also forced some banks to reallocate how much manpower they're putting on these teams. Because if they can't extend new loans or new debt, then there's no reason to have people working on these teams. Have the banks tried to talk to Musk about the situation? They have. They have.

And this is an interesting wrinkle in the story, is that we reported that the banks actually put together a plan to try and alleviate some of the burden on them and also some of the burden on the company. There were talks about a deal where maybe there would be a slight pay down of some of the loans and in exchange they would give X some relief on interest rates. But X was not interested and didn't follow through on that plan. And so the banks are stuck with the debt as is on their balance sheet to this day.

Okay, but they're still making interest off of these loans. Correct. Correct. That is one of the saving graces for this deal, is that they now collect the high interest rates on the loans. Okay, but they also got involved in this because they want to be banking Elon Musk, the richest guy in the world. It's like a relationship play. Has that benefited them at all? It would not appear so. You know, Musk's other companies have not been as capital intensive in recent years, as I think some of the banks had hoped. There haven't been huge bond deals or other loan deals that would help bring in fees and that relationship that they built from the Twitter deal hasn't quite transferred into the lucrative stream of income that I think some had at least hoped they would make.

So no, that has not really played out either. So basically, even if Musk pays back these loans in full, and he might, this bet hasn't really worked out for the banks the way they wanted it to. Absolutely. In some ways, it appears to be a real failure of risk evaluation, which is pretty much the main thing banks are supposed to be good at. They didn't fully appreciate the risk of the individual in question here, Elon Musk, and how he single-handedly could alienate a whole company's relationship with large

swaths of the advertising industry. And while this story is not over, we'll see where the banks wind up. But right now, it looks like they could definitely lose hundreds of millions, if not billions of dollars, agreeing to finance this deal. That's all for today, Tuesday, August 27th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Dana Mattioli. Thanks for listening.

See you tomorrow.