Twitter, FTX, *and* Bird, Part I: Twitter
My title is an allusion to the excellent book, The Education of Hyman Kaplan, in which the eponymous Mr. Kaplan is taking a night class in English/civics/citizenship in the 1920’s. For Presidents’ Day, Mr Kaplan has been far bolder than his fellow students. His speech is not just about Washington, or Lincoln, or both, but is titled “Judge Vashington, Abe Lincohen, AND Jake Nunkovich.” He praises Vashington, praises Lincohen, and tells the class at length what a good man the late Jake Nunkovich was, and how finally he died. Mr. Kaplan ends triumphantly with:
“And I didn’t go to his funeral!”
“Why not?” said the teacher, Mr. Henderson.
“Because I’d have to miss work. And, in America, business is business!”
That being the case, let’s proceed to business, and, in particular, two funerals and a wedding. FTX, the cryptocurrency trading company, is in bankruptcy after embezzlement. Bird, the electric scooter rental company, is in distress and has been inflating reported earnings. Twitter, the social media company, has just been acquired by Elon Musk.
They all are confusing stories, because they all involve corporate accounting and capital structure. As a result, it’s hard to know from the Press what’s going on. I can tell what reporters are doing. As a teacher, I sometimes would have to teach things I didn’t fully understand. I had a choice then between being clear but possibly wrong, on the one hand, and obfuscating on the other. I took the harder road, usually, stating something clearly, clearly enough to be possibly wrong, and then telling the students my doubts or not, depending on whether it would help or hurt their learning. My game theory book, Games and Information, is much the same. I wrote it at age 30, when i didn’t understand game theory as well as I would have liked, but most other people didn’t either, so they avoided being clear and simple and possibly wrong— instead, they skipped topics or obfuscated them. (Mathematical economists do this all the time, surprisingly enough— they do it by defining what is *in* their models or theorems very precisely, but leaving out enitrely all the stuff that’s hard to pin down precisely.)
So, here, I am going to take a wild jump into the dark. I am going to lay out three stories without knowing what I am doing, much. I won’t bother to read stories in advance, or link to them much. I know that would slow me to a stop. Instead, I’m going to work from memory and theory. I do hope, however, that in the comments section you readers will correct me, or add links to good articles. That way, this post can be somewhat crowd-sourced. Then, as comments come in, when I get to it I’ll correct the story . But DO NOT rely on this post for correct facts. I won’t be constantly writing, “What I guess is…” or “Probably…” or “It seems that…”. What the post will be useful for is a mental framework for reading other stories that have actual facts.
Let’s start with Twitter. In 2021 the value of its stock was something like $60 billion. By early 2022 it had fallen to about $30 billion. Elon Musk offered to buy it for $44 billion. Then the stock market in general fell 25%. Musk wished he’d waited to make his offer, because he could have saved 25%, so he sued to try to get out of it, but he failed. Everyone knew he’d fail, so another possibility is that he just wanted to delay closing the deal until he’d had more time to prepare for how to improve the company once it was his. Anyway, he did buy the company, and then he took it private, meaning the stock was still there, mostly owned by him, but wasn’t traded publicly on stock exchanges.
The reason Musk bought Twitter was that it was a badly run company, known to have way too many employees, very few new ideas, and, especially, with no idea of how to earn more revenue. In addition, it was fiercely leftwing, heavily censoring content, and censoring to the extent that it was hurting profits. Banning your most popular attraction (Trump) is not a good way to make money. So Musk was going to be able to make billions while doing good for the world— doing good if you think free speech is good, which of course many liberals on the Left don’t believe any more and which the Berniebros/socialist/communist Left never believed.
As part of the deal, Twitter extinguished all its existing debt but came out with $13 billion in new debt owed to banks, and about $1.7 billion in interest to pay each year at the floating rate as of November 2022. This floating rate was much higher in November than in March, which some people think is another reason Musk wanted to get out of the deal. They’re wrong, though, because the reason interest rates went up was inflation, which was foreseeable and which would apply to Twitter revenue as well as its costs, and Musk isn’t dumb enough to suffer from “money illusion”, the folly of thinking that inflation doesn’t affect prices.
After Musk took over, the Clintons organized an advertiser boycott and a media campaign to whisper that Twitter was going bankrupt and even before going bankrupt it wouldn’t be able to keep its computers working and all the users were going to leave because some vaguely specified bad thing was going to make it so unpleasant to be on Twitter. The advertiser boycott has been very effective, at least for this short period of time. Thus, Twitter lost a lot of its revenue.
But Twitter also lost most of its costs. Musk fired 90% of the employees, and although he will soon double the number of workers by making new hires,costs will be permanently lower.
Anyway, people, including Musk, are now talking as if Twitter might go bankrupt in 2023. That’s something I just can’t understand. I’ll explain why. If Musk had not taken over Twitter, its market value now, after the stock market decline, would be about $22 billion. I think he can easily increase that value to $30 billion and might be able to increase it to $44 billion by improving its management in obvious ways, but let’s suppose it’s worth $22 billion.
Twitter owes $13 billion to banks. Thus, its stock is worth $9 billion, $22 billion minus $13 billion. It’s stock is worth more than zero. Thus, it is not economically insolvent. It is a profitable business.
Twitter is a profitable business despite the fact that Musk probably has just lost billions of dollars because he overpaid for it. What Musk pays for a company does not affect its value, just Musk’s wealth. Musk could have paid $60 billion or could have paid $5 billion; either way, the assets are worth $22 billion and the liabilities are $13 billion for a net value of $9 billion.
On the other hand, Twitter’s value of $22 billion is based mostly on future profits, not current profits. It might well lose money in 2023, and everybody might know that, but the value is still $22 billion because people expect high profits in the 2030’s and beyond. That’s why high-tech companies have such high stock prices. But what happens if Twitter has to pay $1.7 billion in interest to banks and $1.5 billion to employees and its revenue is only $3 billion in 2023? How will it get the extra $.2 billion?
First, to digress, having fired most of the workforce, Musk will only have to pay $.5 billion to employees in 2023, so Twitter’ cost will only be $2.2 billion and if its revenue is $3 billion then its cash flow will be positive, $.8 billion, so no problem. But suppose its cash flow is negative. After all, we don’t know what the advertising revenue will be, either, with the concerted effort of the Media Lords to destroy Musk. So suppose cash flow is negative, a loss of $.2 billion in 2023.
The first question to ask is what under the law will happen if Twitter doesn’t pay the $.2 billion. Suppose it just refuses to pay. Then the banks have the right to foreclose on the company. They can close it down until it agrees to pay. In effect, the banks now own the company. The way it always works out is that the corporation declares bankruptcy, and Bankruptcy Court takes over the company and pays off the banks in some fair way. (Or, there’s Cahpter 11, which is different, but let’s skip over that.)
But I don’t see why it would come to bankruptcy. After all, the company’s stock is worth $9 billion. Why not sell some of that in order to pay the $0.2 billion interest to the banks? Most simply, if Musk owns 100% of the stock, he could sell a small number of his shares to the public or to the banks or to some other billionaire in a private sale, and use the cash to pay the banks. Or, Twitter could issue more shares, selling them to the public (in an IPO) or to the banks or to someone else privately. Twitter would get cash for those shares and pay the interest to the banks. (The downside of that is that this “dilutes” the stock, reducing the value per share of the existing shareholders’ stock.
So why is anyone talking bankruptcy? If the value of the company is greater than $13 billion, it’s safe. Who really thinks that because Musk took it over, the company, which was valued at $60 billion in 2021 and $30 billion in early 2022 (plus debt value in each case) is now worth only $12 billion?
Well, I’m not Hyman Kaplan. This took two hours rather than 20 minutes to write, and so I will continue this in the future. I’ll just leave a tidbit here from Twitter on Bird, the electric scooter rental company.
