Michael Dell, pictured wearing a suit in 1999 in the dorm where he started his eponymous computer company, took it private in 2013, later taking it public again for a huge profit.Β (AP Photo/Harry Cabluck, File)
Shares of Twitter have been trading at close to the price Musk initially offered, which suggests the deal is likely to go through.Β (AP Photo/Seth Wenig, File)
Elon Muskβs proposed US$44 billion deal to acquire Twitter and take it private is reportedly coming together as a courtβs Oct. 28, 2022, deadline nears.
While most people are likely familiar with the idea of taking a private company public β the process that allows individuals to buy and sell a companyβs shares in the stock market β the reverse process is not as well understood and happens far less often.
As a business and law professor, I have been analyzing mergers, privatizations and other corporate deals for over two decades. The most common question I have been getting from students and faculty colleagues is why would Musk want to take Twitter private? Or more simply, what does it mean to go private?
The answers to these question help address a more interesting one: Will he succeed?
Public vs. private
Letβs start with the basic differences between a public and private company.
For starters, a public company is widely held, meaning it has a lot of shareholders. Anyone can buy shares of most public companies, their shares trade on stock exchanges, and their market price is widely available on websites and apps.
A private company, on the other hand, is closely held. It has few shareholders β sometimes just one. It usually is impossible to buy shares of a private company. When it is possible, it is difficult because shares donβt trade on exchanges. You have to find someone who is willing and able under restrictive securities laws to sell you their shares.
In addition, a private company is not required to file disclosures or anything else with the SEC.
Another key difference is the power the chief executive has. While public company CEOs have a lot of power, that power is constrained by things like a board of directors and rules on compensation.
Private companies have no meddlesome boards or rules governing compensation or other issues. And with few or no pesky outside shareholders, leaders of private companies donβt have to worry about the effect their decisions might have on the share price.
As a young company grows, it needs more funding, a problem often solved by doing an initial public offering that pulls in a lot of cash and opens up ownership to anyone.
Taking a company private, as Musk intends to do, reverses the IPO. If it goes through, the Tesla billionaire will pay Twitter shareholders $54.20 a share, which is a 64% premium over the price Twitter stock was trading at a few weeks before Muskβs offer was disclosed on April 14, 2022.
A success story
So why would Musk or anyone want to take a company private? One key reason is control, which allows a buyer to impose his or her vision and singular strategy.
At the time, the company was struggling as personal computer sales slumped amid the rise of the smartphone. As he explained in a securities filing, Dell believed it was essential to quickly transform the company from primarily a PC maker to one focused on providing large organizations with entire information technology systems and managing them.
He said he couldnβt make the transformation as a public company because it would hurt short-term profits, which would likely cause the share price to fall. That in turn could harm consumersβ perception of Dell and lead to employee turnover.
In other words, Dellβs plan was perhaps too bold for a public company. But the strategy paid off β for him, his fellow investors and his company.
Dell himself chipped in $750 million in cash and over $3 billion in the form of his 16% stake in the company, with about $3.4 billion coming from other investors and $16 billion in debt.
By 2018, when the company went public for the second time, Dellβs stake was worth $32 billion, with similar large payouts for his co-investors. The company thrived as well, with sales and profits soaring after a period of low growth, as Dell predicted. Workforces often fall when a company goes private, but Dellβs was up about 50% in 2020 compared with 2013.
In 2005, two buyout firms and a real estate trust won the bidding to take Toys R Us private for $6.6 billion, using $5 billion in debt. Unlike Dell, who knew his business cold, Bain Capital, KKR & Co. and Vornado Realty Trust didnβt have much experience in the toy industry. And they followed a classic private equity strategy of consolidation, closing marginal stores and cutting costs.
As I see it, Dell had a plan that fit his companyβs environment β a key concept in the study of business strategy. Toys R Usβ buyers did not.
Does Musk have a vision?
So what does this all mean for Muskβs potential success at Twitter?
We still donβt know a lot about what he plans to do.
In his letter to Twitter shareholders, he said, βI invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy.β One could ask whether that is a business model or a statement of sociopolitical philosophy.
In any case, he said Twitter canβt βthrive nor serve this societal imperativeβ as a public company. Heβs also tweeted that he would fight bots on the social network, let Trump and others rejoin and potentially let users pay bills via tweet β part of his βProject Xβ super app idea.
Musk understood the physics of launching rockets and the engineering behind building an electric car, but he doesnβt have deep experience running a social media platform or in building super apps. I believe he doesnβt have a thoroughly thought-out strategy that fits Twitterβs difficult environment.
What he will have is a huge amount of debt. Last year, Twitter owed about $51 million in interest on its debt. After going private, the estimates are that Twitter will owe at least a billion dollars annually on about $13 billion in new debt.
In 2021, the company generated just $630 million in cash from operations. That means Musk wonβt have much cash to fund a super app or any other big ideas, unless he is able to attract additional investment in the company.
With the company in his hands, Musk can, of course, do what he likes. He can implement any free speech policy that suits his fancy. He can let Trump and Ye tweet. He can ban Tesla short sellers and anyone who questions his foreign policy initiatives. He can fire 75% of his staff in a heartbeat β something a public CEO would have a very hard time doing.
Itβs too soon to tell if taking Twitter private will be a Dell-like success or a Toys R Us disaster. But given Musk has said he βdoesnβt care about the economics,β it may not matter.
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Erik Gordon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
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Photos: Elon Musk through the years
2000: Peter Thiel, Elon Musk
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2008: Tesla, Elon Musk
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2009: Elon Musk, Tesla Model S
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2009: Tesla, Elon Musk
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2009: Tesla Founders Fight
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2010: Barack Obama, Elon Musk
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2010: Arnold Schwarzenegger, Akio Toyoda, Elon Musk