The Prof G Pod with Scott Galloway - Bonus Episode: Elon Musk v. Twitter — with William Cohan
Episode Date: May 25, 2022William Cohan, a founding partner and writer at Puck, as well as a former M&A investment banker, joins Scott to discuss how Elon Musk's deal to acquire Twitter might shake out, including what options ...he might have for backing out, how Twitter's lawyers might respond, and what it all could mean for shareholders. Follow William on Twitter, @WilliamCohan. Learn more about your ad choices. Visit podcastchoices.com/adchoices
Transcript
Discussion (0)
Okay, we are on with Bill Cohen, who is a professional acquaintance and also a friend
who has done fantastic work and written some of the more thoughtful, rigorous books about
the financial crisis and some of the icons of finance and is now,
are you the founder or co-founder of Puck? What's their title there?
I'm one of the founding partners of Puck, yes, which is, of course, owned by its writers,
which is, I think, a very wonderful development in the history of the world.
Yeah, and you guys have gotten, let me say, you guys have gotten a ton of traction really quickly. I'm constantly reading or your work is being referenced
anywhere. So Puck is a hot young media property. So Bill, I love, you've gotten a ton of press
around your, you've kind of become the Yoda around the Elon saga. And the reason I wanted you on today is to talk about
that. And, or when I say Elon, Elon slash Twitter saga, I'd love to get, let's start,
what is the state of play right now? Where would you describe the current state
of Elon's proposed acquisition of Twitter? I think I would say, Scott, that the market is anticipating him actually being childish and asking for a price cut.
You know, the market is like for Twitter is like thirty seven bucks a share.
His offer is fifty four twenty in cash.
You know, we're not talking stock here.
If it were stock, then, OK, maybe the valuation might be, you know, more fungible.
But cash is supposed to be cash.
So he's offering $54.20 in cash.
Obviously, the market no longer believes that people are going to get $54.20 in cash.
And that means sort of everybody just sort of waiting around for him to figure out the best way to ask
for his price cut. So, I want to take the other
side of this. I want to have a discussion with you because I don't want to acknowledge
where we've had disagreements, you've been more right than I have.
I don't think he's looking for a price cut. I think he's looking to get the hell out of
Dodge. And that is he's looking for a price cut. I think he's looking to get the hell out of Dodge.
And that is he's seen his currency, his wealth, decline 35%, maybe 40% after closing market today.
And on the other side of the coin, I don't think the board would entertain him coming back. He's violated the non-disparagement agreement.
He's violated the securities disclosure agreement.
He's violated the confidentiality agreement.
He's violated the initial agreement to
go on the board. Doesn't this board
look like assholes if they
basically
fall for this again? I mean,
do agreements with this guy mean
anything? Would they accept,
would they entertain a lower price?
Well, first of all, let me say
that, you know, I,
just because I think the market is awaiting a price cut, quote unquote, offer from him, I think you could also be absolutely correct.
He could just have said, what the hell did I get myself into here?
Am I really going to sacrifice everything I've built in Tesla on the altar of Twitter?
Now, I think it's important to note that a lot of people are sort of linking the two stocks
together because of the margin loan, which is now $6.5 billion that he has got a commitment for
that is tied to his Tesla stock.
But that loan does not exist yet, Scott.
None of the financing exists yet.
Because obviously, take the $12 or $13 billion senior secured financing that he's proposing for Twitter.
Obviously, that loan doesn't exist because he doesn't own the assets yet to pledge them
as collateral.
So nothing exists on the financing side. loan doesn't exist because he doesn't own the assets yet to pledge them as collateral. So
nothing exists on the financing side. So everybody's saying, oh, my God, he must be getting
margin calls on his Tesla stock because it's tied to the Twitter. No, none of that's happened yet.
Tesla stock is falling because, as we've discussed before,la stock is like hugely overvalued uh and all of sort of tech
land is taking a hit right now so the fact that it's down 40 actually does not have anything to
do with twitter now uh look he he played the board in round one like a maestro uh but now
he's in a very tough position with the board because now the board's going to hold
him to account to what he signed like you signed a merger agreement with us with uh out you know
representations and warranties and breakup provisions and things that you can do to get
out of it look and if you want to get out of it okay we can litigate you can pay us a billion dollars you can
do any number of other things now having said that uh everything is a negotiation even a signed
merger agreement uh and so uh if you know he hadn't done any due diligence prior to you know
signing the merger agreement which is of course,
you know,
somewhat foolish,
but maybe that's the way he felt he should do it.
And now he's quote doing his due diligence.
And now he's quote,
you know, finding things like bots.
And he's obviously looking for reasons to cut the price.
Now,
obviously we all knew 5420 was like,
man,
I sent from heaven.
If you're on the board of this company uh and I don't know what the line is Scott but there's a line for fairness Goldman Sachs and JP Morgan
Chase have done their fairness opinions there's a band of fairness it's not just a point, it's a band. Where in this band of fairness, you know, any
price cut might fall is, of course, the open question. So, look, if he went to 50, that's
still fair. If he went to 45, my guess is that would be still fair. I think that, you know, and it's got to be something with like 420 at the end.
So maybe it needs to be 4420 or something.
If it was 4420, 10 bucks less, they would still take that, Scott.
They would be pissed off.
A lot of ARBs would be pissed off and probably sue the heck out of them.
Although I didn't sue the World's Best Guy.
Not exactly sure. You know, a lot of shareholders would be pissed. There'll be shareholder losses.
But I think the board would, you know, reluctantly agree to say it's fair. If he becomes a total
asshole and tries to do something like in the threes, like where the stock is trading now,
then the board's going to walk away and tell him to go pound sand and the whole thing will blow up. You'll be right.
He'll be.
I mean, as we've discussed, I mean, most deal guys would never operate this way.
I mean, most people care about their reputation as deal guys would never.
They would do the first phase, how we got to the merger agreement.
Everything since the merger agreement has been buffoonery.
So let's talk a little bit about let's start with Twitter's not value, but market value.
So he started acquiring shares in January when the stock was at $32.
If you look at the peer group, whether it's Snap, whether it's Meta, and their performance, since he started acquiring shares at $32, they're off 30% to 40%.
Meaning that the natural—
Snap is off 70%.
70%. I didn't know that.
Okay, so let's call it just—let's be generous.
From $32, the natural level for Twitter, I think you'd argue,
without this exogenous Elon event, would be about $20 right now.
And he signed a contract where my understanding is he waived diligence for $54.50.
I can't imagine.
I'm sorry, $54.20, excuse me.
This seems like now it's nothing but a negotiation to reduce the breakup fee. Well, first of all, Scott, it seems like a lifetime ago that he agreed to a G420, but it was April 25th.
Is that right?
Isn't that interesting?
You know, Scott Knox, his lawyer, his law firm, gave Twitter a draft copy of the merger agreement on April 24th. So they turned it around and signed
it in a day. Now, the market has had a rough go for the last seven or eight weeks. And in the
middle of what was the ongoing rough go, he agreed to pay $54.20. So obviously, it was fair. There are people who say, oh, my God, he should pay more. It's not
fair. Microsoft should pay 70. I mean, there's nobody coming in to pay more. The other thing is
the board of Twitter did not even authorize its bankers to call third-party potential acquirers because either they knew that nobody
would say yes or be interested, or there was such a big advertisement on Twitter put on
Twitter because of all the publicity around Elon's bid that if anybody was really interested
at above 5420, they'd come out of the woodwork.
Obviously, no one is at above 5420, they'd come out of the woodwork. Obviously,
no one is interested above 5420. So if I'm the board, I just do what the board says, which is
we intend to enforce the contract that we signed with this guy. Now, that doesn't mean that,
as we were talking about, that if Elon comes back and says, all right, I'll give you $44.20, which is quite the slap, they know, the board knows, its bankers know, just as you said, that without Elon, it's in the 20s.
It's got a two-handle.
So $44.20 still looks pretty good. But at some point,
the embarrassment factor, the unfairness factor, the schmuck factor is too much. And they'll say
no. And then he'll have to decide. So then what happens? He'll have to decide whether he blinks,
as opposed to the board blinks. He'll have to decide whether to pay the billion dollars or
whatever it is that he has to pay to get out of this thing. And he'll have to decide then whether to slap a tender offer in the
paper and go completely hostile at 25 and see who shows up. Or he just walks away and pretends this
never happens. But it's not going to result in Tesla stock going back up, by the way. Because
again, the margin loan related to Tesla and Twitter does not exist yet.
So let's try and talk about what we think is probably a known known, and that is he doesn't
want to close on this deal at $54.20. And so he either wants to close on a much lower price,
or he just doesn't want to close at all. He's like, okay, just get me out of here.
Now let's talk about the exit wounds.
There is a billion-dollar breakup fee, but there's also a specific performance clause, right?
Right.
I think Twitter in a Delaware court will make the argument, oh, no.
You have to close.
You have to close.
But this goes back to what you said.
Can you force someone to show up with $45 billion?
Can you legally enforce that?
And if you can't, which I don't think you can,
is there any precedence for the kind of damages or judgment that he might be looking at?
Deals have been required to be closed via specific performance clauses.
That has happened.
People have been required to close
deals by the court. Now, I don't think I've ever heard of a deal being required to be closed
of this magnitude, uh, where the person on the other side is the world's richest guy.
But I mean, it would be well within the rights of the Twitter board to go to Delaware court and demand that.
He's completely conceded all of the power in this relationship to the Twitter board.
But let me ask you this, though.
Okay, so I don't think you can physically force someone to show up with $45 billion.
But you could technically say you failed to show up.
You owe the company $45 billion. Could that happen? Company to show up. You owe the company 45 billion. Could
that happen? Company shareholders. Yes. You owe the company shareholders 45 million. Yes. I mean,
I don't know how they enforce that. I mean, you know, what's the enforcement mechanism? I guess
it's, I mean, violating a contract, it's a tort, right?
It's a civil lawsuit.
I don't think it's criminal, so I don't think they can put him in jail.
They can fine him until he complies, I guess.
Because when I talk to people about this, they said, I've heard two viewpoints.
And that is, Scott, there's precedent for organizations walking from deals.
In 2008, a lot of very name-brand private equity firms, the market, they agreed.
They signed a merger agreement or a purchase agreement.
The market changed substantially.
And they started saying, oh, no, something's changed, material average condition, whatever it is, forced to measure, and we're out.
And they had to pay a price.
It was a negotiation.
They had to pay breakup fees.
But they weren't on the hook for the full purchase amount now. And so I've had people say,
there's precedent for this. He'll pay something, but it won't be anything near the $45 billion.
And all of this is the beginning of that negotiation. And then I've had other people say,
actually, Scott, since then, because of that, these agreements have become more airtight
and that he effectively signed
what is a hermetically sealed agreement
where the lawyers for Twitter,
who are $1,200 an hour lawyers,
said, we're going to button this thing up
like no fucking tomorrow.
According to the people I know,
said this agreement is going to go down
as one of the most airtight agreements in history,
where they probably screwed up was the breakup fee, because that's a key point in the negotiation.
But it strikes me, and again, I don't know Delaware court legal history here, but we're
in uncharted territory. I've never seen anything like, I started as an investment banker like you,
I've never seen anything remotely similar to this.
And it goes to a whole host of societal issues where these individuals not only think, but
have real evidence that they can behave, the rules don't apply to them, that they can just
do shit no one else has been able to do before.
Do you think there's a, and this might be me projecting, do you think a Delaware court
might say, you know what,
this notion that people don't have to live up to agreements is dangerous for a lot of reasons.
I was thinking of a scenario here where Apple says, we're going to buy Netflix, it's cheap.
Netflix is, this overnight is going to cement us as the premier media company in the world.
And then Zuckerberg goes, you know what, I can't, I hate Apple, I hate Tim Cook, I can't let this
happen. I'll bid them. And they go, what, would we really pay that much? I hate Apple. I hate Tim Cook. I can't let this happen.
Outbid them, and they go, what? Would we really pay that much? I don't care. Just outbid them.
Get them to sign a contract, and in six or nine months, maybe we close. Maybe we don't,
and if it costs us a billion, two billion, five billion dollars, Elon did it. He walked.
Who cares? We kept it out of the hands of Apple. You could end up with a series of just false flags and head fakes
in M&A, which would be bad for shareholders, bad for rule of law. Is this where potentially
Delaware courts take a stand and say, boss, agreements are agreements, and we're going to
hit you hard here if you decide to violate this agreement? Or is this me with my emotions getting out ahead of me? I think at moments like this, thinking about how a court would set a
precedent or what the lawsuit would look like or what the, you know, going to the mattress here
legally, my gut tells me that we're going to have a practical solution,
not a legal solution. So what is the practical solution? Okay. If you're right, and he doesn't
want to own this thing, and it was just a foolish lark, then, I mean, is the remedy that he just
pays the billion dollars and walks away or pays five billion
and walks away, whatever it is that they have to get him to do, you know, to wrap it all up in a
knight's bow. And, you know, that's happened. People have walked away from deals lots of times,
you know, especially when the markets got rough. You know, I don't know what he's going to claim.
I'm sure they can claim something. You know, one of the things he can claim, Scott, is, you know, he's got the senior secure debt
committed. He's got the margin. You know, he increased the size of the equity hole from 21
to 27 and a half, you know, and then he announced that he had 7.1 percent of what I call the
eclectic 18 who are putting money in. Then he got Prince Al-Waleed to roll over his $2 billion.
Elon can roll over his $4 billion, at least at $54.20. He's asked Jack to roll over,
but Jack hasn't said he will yet. If I were Jack, I'd take that money and run.
But if you do all that math, the $27.5 billion equity hole is still about $14 billion, which he hasn't explained
yet. Now, I can't get my equity financing. That's my out. I can't get it. I'm sorry. I've tried. I
can't get it. My Tesla stock is tied up. So he has outs. Forget the bot thing. The bot thing is so
stupid. It's not even worth talking about. Can he get the financing? It's possible that the senior debt holders, the senior banks who committed to the bank financing might get squeamish. It's possible that Morgan Stanley et al., who committed to the margin loan, would get squeamish. But I don't see that happening because he reduced the margin loan in half.
So I'm not sure that's going to be out.
But the equity hole of $14 billion is legit and real.
And he hasn't come up in the last couple of weeks with any more investors here.
And believe me, it wouldn't surprise me if no one wanted to get near the equity of this
thing.
I think my gut tells me we're not going to create precedent in
Delaware, although I agree with you that all sorts of bad things could happen if Elon isn't
just allowed to slither away, just like a lot of bad things have happened, frankly, in my mind,
because Trump has been allowed to slither away. In one column, I equated Trump and Elon in terms
of the way they do deals. I mean, Trump is a pariah on Wall Street.
He's never been held accountable for all the things he did wrong. Elon, if he screws this up
and does some of the things you talked about, he will become a pariah on Wall Street. I don't think
Elon can frankly afford to become a pariah on Wall Street. He's got his wealth tied up in Tesla, which is a whatever, an $800 billion
company now. If Wall Street, if that, you know, a rah-rah, a Wall Street rah-rah is over,
that's going to really hurt him. We'll be right back.
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constant contact dot ca so let's let's break down so first off it does sound as if he can make a
credible claim to a delaware court that he couldn't get the financing, that that is a satisfactory condition of not closing.
Yeah, he has said, I'm going to have $27.5 billion of equity financing here.
That's a lot.
But let's break it down because it's not all created equally.
The $12 or the $14 billion in senior secured debt financing. He can get that because the lenders go,
look, for whatever Twitter's failings are,
it's worth $12 or $14 billion.
So we'll loan because if he defaults,
we'll take control of the company.
That'll be secure debt,
secure based on the assets of Twitter.
I don't know what the hell the assets of Twitter are,
but whatever they are, they're all going to that.
It is a company that does
a billion dollars in EBITDA
and there's a bunch of people
out there that claim
it's worth a lot more.
Anyway, so I can see
how he's lined up
the debt financing.
On the equity side,
the senior debt financing,
excuse me,
on the equity side,
I don't think anybody
other than a few VC funds
who will put 50 or 100 million
in just to cozy up to Elon for future deals,
are not calling him and saying, hey, FYI, I'm not down any longer with going in at $54.50
on a company that looks like it'd be worth in the 20s right now.
That just makes no sense.
You can agree that the world has changed, and I won't say anything publicly,
but I'm out for the equity
side of this. Now, that should, if you will, give him a ripcord to pull and say to a judge,
I couldn't raise equity financing. But if he's got $150 billion in Tesla stock,
can the judge then say, boss, you may not want to show up with this money, but you're capable of it, so I'm holding you
to this purchase agreement because you are capable of raising this equity just by selling
Tesla stock. That may be bad for Tesla. That may be a lack of diversification or a bad business
decision you don't want to make financially, but you are absolutely capable of showing up with this equity. Could they make that argument?
I'm certain that they could make that argument.
You know,
what we don't know about Elon and his personal balance sheet is what other
cockamamie things he's done.
Yeah.
Has he committed it?
Yeah.
Yeah.
Is it already committed?
I mean,
I have no idea how he's funded SpaceX.
I mean, and there's been a lot of capital put into SpaceX.
Let's not kid ourselves.
And by the way, what he's done with SpaceX is pretty amazing.
Extraordinary.
Getting his rockets to land on the platform.
Yeah, I think it's going to be worth more than Tesla for a lot of reasons.
And I have no idea how he financed that.
So what we don't know is what the rest of his, how he's pledged that Tesla stock isn't
even free to be used as collateral for more equity.
All he said on the equity side here is, I'm going to show up with $27.5 billion.
He showed up with like $13.5 billion so far,
and that includes his stock that he would roll over.
So he's got $14 billion to come up with.
The 7.1 is the eclectic 18, and that's just like, okay,
Larry Ellison saying, sure, Elon, I'll write you a check
if this thing ever closes
from my foundation. But that could easily be pulled. Any of those could be pulled. I don't
think any of those will pull. I don't know half of them. What I find so interesting about that
Eclectic 18 is that none of them are private equity firms. You know, it looks like there's no Blackstone, there's no Apollo, there's no TPG,
there's no KKR.
That's like a whole group of, you know,
deep, dry powder, deep pocketed equity players
that has just like said, NFW.
And by the way, I don't blame them
because as you just said, you know,
we can be generous and we can say,
Twitter is going to do a billion dollars or you could, just said, we can be generous. We can say Twitter is going to
do a billion dollars of EBITDA. That's being generous. So 44 times EBITDA, that's what he's
proposed here. 44 times EBITDA. I think while private equity deals have gotten really out of
control in terms of valuations in the last few years. It's maxed out at like 11 and
12 times EBITDA. That's maxed out. Used to be six, seven, eight times EBITDA now because of the cheap
financing and everybody's got so much money. 11 and 12 times EBITDA, whatever they can make their
IRRs. 44, that's a totally different zip code. So I don't see any private equity firms coming
into this unless they want to be friends of Elon.
Does anybody want to be friends of Elon?
Does Steve Schwartzman want to be friends with Elon?
I don't think so.
The bottom line is if he's looking for an out, we both know he's going to find one.
And no one's going to challenge him legally on it.
They may say, okay, instead of a $1 billion breakup fee, pay us $3 billion.
Okay? Now, if you don't
think... Let me just push pause there. Now, granted, I'm emotional, but I've been on a lot
of public company boards. Yeah, thank you, Bill. I would be like, oh no, we're going to hit this
bitch hard. We're going to go... My attitude right now would be, we're closing, we'll see you at
closing. We're hoping to see you on closing.
And if we don't see you on closing, we know we'll see you in a Delaware court.
And our starting position is you owe us $45 billion.
That's the agreement.
You have the money.
This will be our case.
And at this point, we're not settling for 44.
That's how I would approach this on the board.
When I think about the damage here, Bill, I mean, I feel as if he has basically laid bare that Twitter is worth a lot less than it is.
No one would come in.
No other bidders.
You were right.
I thought there'd be other bidders.
There weren't.
An enormous distraction to the company.
Shit posting everywhere.
My guess is it's got to be chaos
among senior management.
Do I want to work for this guy?
What happens to my job?
I'm going to start returning the calls
of headhunters that are offering me jobs
that I haven't taken for 10 years,
much to the detriment of my family's
economic security.
I'm out.
I am punching out.
And Parag feels like he can't say anything. This guy,
and I've said this all along, and again, I have a bias against C-Line because he calls me names on
Twitter, but he brings volatility, not value, to his side hustles. He has literally been an agent
of chaos here. I mean, there might be a good thing that might come from it is if they actually
address the bot issue. I've always said it's a huge problem.
He's the one that benefits from the bots.
The bots that attack me all have Tesla in their bios.
And his bots have unnaturally, in my view, elevated the price of Tesla stock by creating this narrative that Tesla is this amazing energy company that's solving climate change, this feels like it has all sorts of what I would call societal
and M&A and corporate rule of law and rule of fair play overlay. So to wrap up here,
you think kind of, it sounds to me like kind of possibly a lower number. You think in the fours,
the board would accept it, hum and haw, but then accept it. Anything lower than that,
they walk and it's going to be a negotiation over a breakup fee,
but you don't think it's going to be a game-changing judgment against him that he'll
probably get away with, I don't know, a fairly expensive rap on the knuckles, but it won't be
anything sort of precedent-setting. It's not going to be a transcendent,
it's not going to be like the Revlon decision from 1986. It's not going to be a transcendent. It's not going to be like the Revlon decision from 1986. It's not going to be
a transcendent, illegal battle because, because even though if you were on the Twitter board,
Scott, and I have no doubt that you would be vocal and you would say these things,
okay, then what would happen? Put me in a corner.
What would happen is, is what always happens.
Then Wilson Sonsini and Simpson Thatcher,
Twitter's two law firms would say,
Scott, you're right to be emotional.
You're right on the business points.
You're probably even right on the legal points.
But, okay, do we really want to go down this path of of scorched earth legal battle with the world's
richest guy and then all your other board members will all talk about it we'll ask about it we'll
have executive sessions about it everybody will talk about it and think of sleep on it sleep on
it we'll come back tomorrow and then, cooler heads will prevail, Scott.
And the practical solution will be,
let's try to either get the best new deal
for our shareholders that we can get,
or if he doesn't want to go that route
or he's going to be a real jackass about it,
then for hell with that.
Let's just get a better, let's get 5 billion out of him and he can walk away. We can have 5 billion
more that we could use for who knows what at Twitter and run this company as a public company,
take our lumps along with all of our brethren like Snap and Meta and everybody else and trade
in the 20s, yes.
There'll be shareholder lawsuits.
But I don't think the shareholder lawsuits are going to be directed
to the Twitter board.
I think the shareholder lawsuits are going to be directed to Elon Musk,
and who knows how that's going to play out.
But he always manages to wiggle out.
And then they'll go on, and Twitter will be, quote unquote, fine.
Elon will have completely eviscerated his reputation on Wall Street and what the implications
of that are for Tesla, SpaceX, and the Boring Company, and anything else cockamamie that
he wants to do, well, we'll have to watch and see what happens.
Yeah, I think the good money is on the viewpoint for the guy with the hair. Bill,
just when you say that, you just sound infinitely reasonable and practical, and I'm neither of those
things. Bill Cohan is an author and the founding partner, a founding member, partner, journalist
of Puck, and has kind of been the go-to on the Elon Twitter drama. Bill, I really, I love speaking to you. You're both insightful and civil,
and I love how you're able to encapsulate both sides of the argument and make what feels like
an infinitely reasonable, I don't know. Every time you say something, even though I want to disagree,
I find myself just nodding my head and going, you know, that just makes a lot of sense. Bill,
thanks for your time. Thank you, Scott. Always a pleasure to be on with you.
Truly.