Damodaran believes what has made the entire saga extra attention-grabbing is that it focuses on not solely Musk and Twitter, however on broader problems with social and financial worth of social media platforms, company governance, investing and the way politics has turn out to be a part of nearly each dialogue.
“There are some Twitter personalities who’ve extra followers than Musk, however most of them are both inactive or tweet pablum, however Musk has made Twitter his car for promoting each his company imaginative and prescient and his merchandise, whereas participating in distractions that typically frustrate his shareholders. Whereas he has made veiled guarantees of different platforms for expression, it was a shock to most when he introduced on April 4, 2022, that he had acquired a 9.2% stake within the firm,” Damodaran wrote in his weblog “Musings on Markets”.
Twitter’s efficiency over time
Damodaran says with the intention to perceive the maths behind Musk’s bid for Twitter, one has to additionally perceive the corporate’s journey to its present state of affairs.
He says Twitter, which was based in 2006 by Jack Dorsey, Noah Glass, Biz Stone and Evan Williams succeeded vastly in attracting folks to its platform, hitting 100 million customers in 2012, after which doubling these numbers once more by 2013, when it went public ,with an IPO.
“The providing value for Twitter’s shares was set at $26, by its bankers, and the inventory debuted on November 7, 2013, at $45. Within the weeks after, that momentum continued to hold the inventory upwards, with the worth reaching $73.31 by December 26, 2013,” he says.
However over time since its IPO, Damodaran feels the Twitter story has taken an sudden flip which none of its founders or its traders would have predicted.
Though it has carried out higher than anticipated on some parameters of person engagement and affect, it has lagged within the working numbers measuring its success as a enterprise.
“As Twitter’s person base and affect have grown, there was one space the place it has conspicuously failed, and that’s on enterprise metrics. The corporate’s revenues have come primarily from promoting (90%) and whereas these revenues have grown, they haven’t saved up with person engagement,” he says.
Damodaran says the market has responded accordingly to the disappointments on the working metric entrance as Twitter’s inventory value has dropped to under IPO ranges in 2016 and its efficiency has lagged its social media counterparts.
The Twitter-Musk tussle
Damodaran says whereas Musk’s acquisition bid isn’t precisely typical, it has initiated a totally predictable tussle between Twitter and Musk.
Unsurprisingly, Twitter’s preliminary response to Musk’s bid was that it was value rather more than Musk’s providing value, and that its shareholders could be receiving too little for his or her shares in the event that they offered.
Musk countered this argument by stating that the market clearly didn’t imagine that present administration may ship that greater worth, and that he would have the ability to do a a lot better job with the platform.
In keeping with Damodaran, though there’s a risk that Twitter’s worth could possibly be greater, it’s not a very sturdy argument for the board to make, trying on the present eventualities.
What counter arguments can each competing events provide
Damodaran says Twitter’s administration is anticipated to say that its platform has the potential to ship considerably extra worth, both by altering the enterprise mannequin or high-quality tuning the promoting mannequin.
He feels Musk will agree with the argument about Twitter’s untapped potential, however will declare that solely he could make the adjustments to Twitter’s enterprise mannequin to ship this potential.
“The issue that Twitter’s administration will face in mounting a case that Twitter is value extra, whether it is run in another way, is that they’ve been the custodians of the corporate for the final decade, and have been unable or unwilling to ship these adjustments. Shareholders in Twitter will welcome administration’s willingness to contemplate various enterprise fashions, however the timing makes it really feel extra like a deathbed conversion fairly than a effectively thought by means of plan,” he says.
Musk’s true intentions
Damodaran believes it’s tough to foretell proper now what goes by means of Musk’s thoughts and what Musk shall be doing, if he acquires Twitter as he additionally has a trillion greenback firm to run in Tesla and a bunch of different ventures that he’s a part of.
“Musk’s unpredictability makes it tough to guage what his endgame is, a minimum of with Twitter, since he may do something from promoting his place tomorrow to bulldozing his means by means of a poison capsule, taking Twitter down with him. The truth that Twitter’s inventory value has stayed stubbornly under Musk’s providing value means that traders have their doubts about Musk’s true intentions, and whether or not this deal will undergo,” he says.
Attainable outcomes of Twitter-Musk saga
Damodaran says it might probably’t be denied that Musk has compelled Twitter to behave, and it’s doubtless that the corporate that emerges from this episode will look completely different from the corporate that originally went into it. He sees Four attainable outcomes
Standing Quo: Damodaran says it’s attainable that Twitter might forestall Musk’s takeover bid and that the poison capsule adopted by the board will drive him to stroll away from the deal, resulting in him promoting his shares alongside the way in which.
Musk takes Twitter non-public: Damodaran says Musk has the flexibility to tug off the not possible which he has proved on many events so it will not be a shock if he is ready to purchase sufficient shares in a young provide and/or persuade different shareholders to place stress on the board to take away the poison capsule, and permit him to maneuver ahead together with his plans.
Unbiased, however with company governance adjustments: Damodaran says even when Twitter is ready to withstand Musk’s entry, institutional traders are anticipated to push for change within the firm, with new board members and even perhaps a brand new CEO.
“The way in which that the corporate’s administration and board have dealt with the deal doesn’t encourage confidence of their capability to run the corporate. In truth, having gone by means of 5 CEOs over Twitter’s life, it’s value asking the query whether or not the dysfunction on the firm lies with the board, and never simply with the CEO,” he says.
Another person acquires Twitter: Damodaran says there may be additionally a risk that the board could also be keen to promote the corporate to somebody aside from Musk, at a barely greater value solely to save lots of their face.
Is the Twitter-Musk saga a political story?
Damodaran believes the Twitter-Musk saga at its core is a political story and never a monetary one.
“As with most issues political, you’ll present an alternate, extra reasoned, argument for why you might be for or opposed, however you might be deluding your self, and hypocrisy is rampant on either side.,” he says.
Damodaran says critics of Musk argue that Twitter must be preserved or a minimum of protected against cash digging billionaires and they need to not management social media platforms however the identical critics usually are not as upset about Jeff Bezos proudly owning the Washington Put up or a George Soros bid for Fox Information.
“Whether it is Musk’s character that you just really feel is what makes him an unsuitable proprietor, I ponder whether we ought to be requiring full character checks of the homeowners of different media corporations,” he says.
Alternatively, some individuals are in favor of the deal simply because they need Twitter to be a bastion of free speech. however they have to keep in mind that each social media platform is concerned in a point of censoring, for authorized causes and self preservation.
“It also needs to be famous that whereas these disaffected with Twitter have tried to construct their very own social media platforms, they nonetheless get way more mileage from their presence on Twitter than from their posts on alternate platforms, and the complaints about Twitter not being balanced appear to finish up being on Twitter,” he says.
Damodaran concludes that whereas there are some who come to Twitter for information and witty banter, many come to the platform to witness, and typically participate in deranged arguments about trivial points.
“A lot as we prefer to complain concerning the ugliness and anger that we see on social media, it’s precisely these forces that draw customers to it, and arguing that Elon Musk will make it worse, misses the purpose that he symbolizes the strengths and weaknesses of the Twitter platform higher than another particular person strolling the face of the earth,” he says.
(Disclaimer: This text relies on Aswath Damodaran’s article in his weblog “Musings on Markets” )