Dud deal: The real problem for Musk’s Twitter

Anointing yourself the guardian of free speech is one thing. Living up to it is something else altogether, as Elon Musk is quickly discovering.

It’s been just over a week since the Tesla tycoon took over Twitter and already it looks like the entire thing is in danger of coming apart at the seams.

Having fired the board – a hasty act, even for someone as impulsive as Musk – it is surely beginning to dawn on him that there will be no quick fixes in his effort to prevent the $US44 billion ($69 billion) buyout turning into one of the worst deals of all time.

Sacking the executives who had held Musk to a bid he tried to wriggle out of was the easy part. Everything else that has been floated as a magic solution to Twitter’s problems amounts to little more than throwing darts at the wall. He has even resorted to crowdsourcing business ideas, a pretty clear sign that he is short of his own.

Musk’s biggest problem is how he structured the deal. He wildly overpaid; the debt that financed it will be hugely expensive; and it was horribly timed, too, coming just as the world’s central banks slam the door shut on a decade of free and easy money. It has all the hallmarks of a classic private equity style leveraged mega-buyout, the sort that so often goes spectacularly wrong when billionaires believe their own hype, get far too excited and bite off more than they can chew.

Not for the first time for a man who once called a heroic cave diver “pedo [sic] guy”, Musk has allowed ego and bravado to get in the way of old-fashioned common sense.

For Musk to stand any chance of success he has to persuade advertisers, who account for roughly 90 per cent of Twitter’s turnover, to stick around.

There is a wealth of academic research showing that mergers and acquisitions rarely end well, often for neither acquirer nor acquired. But large-scale, heavily debt-fuelled, top-of-the-cycle deals have a tendency to blow up spectacularly. When Musk first pounced on Twitter back in April, his admirers marvelled at his audacity and the speed with which he moved.

In just 12 short days, Musk not only convinced Wall Street to furnish him with the financial wherewithal for the biggest take-private deal since the 2016 purchase of data storage giant EMC by Dell for $US67 billion, he managed to persuade an initially sceptical board to throw their weight behind the bid too.