Elon Musk’s Twitter Deal: Valuation and Financing of the Leveraged Buyout

On April 14, 2022, Elon Musk offered to buy Twitter Inc. for US$54.20 per share, for a total cost of US$44 billion. Musk hoped to make the social media network a platform of free speech, and the company profitable and cash flow-positive far more quickly than its management team at the time. Musk’s leveraged buyout was mainly funded by a margin loan backed by his own shares in his company, Tesla Inc. On July 8, 2022, Musk announced that he was backing out of the deal. Almost immediately, a lawsuit was filed to force Musk to close the deal as required by the merger agreement. In response, Musk had to decide whether his bid of US$54.20 per share was still a fair valuation for the purchase, if a leveraged buyout with a margin loan was the best financing plan, and whether to confirm or abandon his agreement to buy Twitter Inc. If he chose to walk away from the deal, he would have to consider the potential loss, depending on the outcome of the pending lawsuit in the Delaware Court of Chancery.

This case is designed for advanced undergraduate- or graduate-level corporate finance courses on mergers and acquisitions, valuation analysis, negotiation, and strategy in business schools. Students specifically learn how to conduct the “ability-to-pay” analysis—or the free cash flow-to-equity (FTE) discounted cash flow valuation—in leveraged buyouts, whereby residual or levered cash flows are calculated and then discounted at the required rate of return of the equity holder (or sponsor) to determine the maximum amount that the buyer should pay for a targeted company. The case is suitable for business school students discussing legal aspects of mergers and acquisitions, including key contractual terms in merger agreements. It is also suitable for law students to describe the relevant financing and valuation issues that are intrinsic to merger transactions. After completion of this case, students will be able to<ul><li>evaluate an acquisition qualitatively, particularly when the transaction is highly leveraged;</li><li>complete a quantitative discounted cash flow and multiple valuation analysis;</li><li>analyze the strengths and weaknesses of the multiple approach when valuing a company that is not yet profitable;</li><li>analyze and value social media companies using the active users valuation method;</li><li>examine considerations and terms of deal financing; and</li><li>discuss legal aspects of mergers and acquisitions transactions.</li></ul>

• LBO
• valuation
• DCF
• M&A
• Twitter
• Elon Musk
• deal financing