Sitting Around the Table
May 11, 2022
Dow Jones 32152
S&P 500 4012
We think Elon Musk will Re-Negotiate the Twitter Deal making a Short
We are going to talk about the history of Time Warner and the current stories about Twitter as an educational metaphor for how to think about the stock market. Enjoy this and then we will watch in real-time to see how it works out.
About 20 years ago, there was a world-renowned company called Time-Warner. This was a blue-chip company with an outstanding pedigree. Henry Luce a very powerful publisher, perhaps the most powerful publisher of the 20sthe century started it out with Time Magazine. Luce was probably as wealthy as he was powerful. Every President of the United States would take his call and felt honored to speak with Luce. Decades later, Steven Ross would take control of the company and build it out into an even more powerful entity. It eventually became Warner Communications. After Ross died, eventually Gerald Levin took over Time Warner, and then one of the biggest corporate mistakes in history took place.
On January 10, 2000, in one of the biggest media mergers in history, America Online Inc. announces plans to acquire Time Warner Inc. for some $182 billion in stock and debt. The result was a $350 billion mega-corporation, AOL Time Warner, which held dominant positions in every type of media, including music, publishing, news, entertainment, cable, and the Internet.
The AOL Time Warner merger came at the height of the so-called “Internet bubble,” when dot-com businesses were on a meteoric rise and their future seemed limitless. The idea was to combine Time Warner’s impressive book, magazine, television, and movie production capabilities with AOL’s 30 million Internet subscribers to form the ultimate media empire.
Under the terms of the merger, which was cleared by the Federal Trade Commission in December 2000 and formally completed in January 2001, AOL shareholders owned 55 percent of the new company while Time Warner shareholders owned 45 percent. AOL’s co-founder, chairman and chief executive officer, Steve Case, became chairman of the new company, while Time Warner chairman and CEO Gerald Levin were named its CEO.
The potential windfall promised by the plan to sell Time Warner content through the AOL network never materialized, and when the Internet bubble burst in 2001, the company’s losses reached record proportions. Levin, widely blamed by shareholders for allowing Time Warner and its stable old-media assets to be effectively taken over and dragged down by the ailing new-media division, resigned in December 2001. He was replaced by Richard Parsons, a decision that later contributed to increasing internal tensions and the departure of chief operating officer Bob Pittman, who had been passed over in favor of Parsons.
In 2002, as investors pulled out en masse of many Internet-related stocks, AOL Time Warner reported a quarterly loss of $54 billion, the largest ever for a U.S. company. Time Warner spun off AOL in 2009. In 2018, AT&T acquired Time Warner.
So here’s the interesting part which is also why we are telling you the story. This whole deal took place during the so-called dot-com or Internet craze in 2000. Then it hit the fan, and everything was collapsing. During the craze, $1.6 trillion was raised in Internet IPO stocks. Within 2 years the $1.6 trillion was worth maybe $60 billion. The stocks were down 95%, just about all of them.
While Time Warner was going through with the deal we at Value Stock Players were wondering why Time Warner is going through with this. It makes no sense at all, none whatsoever. The only reason why the stock price of AOL or America On-Line was high was that Time Warner was going to take them over. If Time Warner killed the deal AOL’s stock price would collapse 95% like everything else. Kill the deal, pay the walkaway price and live to continue your existence as an incredible blue-chip company and fight another day.
No, Time Warner did the deal and Time Warner, one of the great companies of the 20th century ultimately collapsed because of it. AOL had taken Time Warner to the cleaners and destroyed the combined companies when AOL was destroyed.
We see the same thing happening with Elon Musk and Twitter
Technology stocks have been destroyed in this market. Completely destroyed, maybe the carnage is over, maybe not. If Russia happens to lob a tactical nuclear weapon during this Ukrainian war, operation, or any other name you want to give it, they will shut down trading on the exchange for a day or two before it reopens perhaps thousands of points lower. It won’t be higher, that’s for sure.
Elon Musk has basically offered $54.20 for each share of Twitter to take the company private. The liberals are going nuts because they don’t want Musk to own Twitter, principally because he might allow former President Trump to use the service once again. They seem to think it is alright for Vladimir Putin to have an account on Twitter but not Trump. Musk is more attuned to the notion however I can making money is the way to make money.
Twitter has climbed 22% since April 1, before news broke of Musk’s 9.2% stake purchase, to finish Monday’s session at $47.96. While that indicates the market still sees a material execution risk for the deal, it has proved far more stabilizing than the tech sector in general. This outperformance in the stock market has nothing to do with Twitter’s fundamentals. It is due to Musk’s bid. It is propping up Twitter’s price which would collapse probably in half without the Musk bid on the table.
Now the Board of Directors has accepted Elon Musk and his bid at $$54 per share. If Musk were to walk away, he would owe Twitter $1 billion as a breakup fee. Twitter had poor first-quarter numbers and we think its social media platform has inflated user statistics. Put that together with the tech stock crash we are going through right now and we think Musk would be out of his mind to pay the full market price for Twitter. Sell in May and walk away. He can re-negotiate the price and get it for 40% or 50% lower than where it is today. Give Twitter the billion and walk away.
If Twitter goes down by 15% or 20%, Musk still saves billions on the deal. We would be shocked if he doesn’t walk away. The only people getting killed on this deal would be the arbitragers who bought Twitter in anticipation of the deal being consummated along with the originally agreed terms. This deal is the Time Warner / America On-Line deal all over again and with folks that didn’t work out. Let’s see if Musk kills the deal or if he is not as smart as we all know him to be.
In addition, Musk has several other players in the deal financing it with him. Saudi billionaire Prince Alwaleed Bin Talal is an absolutely brilliant guy in his own right plus venture capital firms Sequoia Capital and Andreessen Horowitz. We know Andreessen remembers the Time Warner debacle well, so he probably is whispering in Elon Musk’s ear right now. We would be yelling. Remember we are not advocating taking a financial position in this deal because we tend not to recommend the shorting of stocks for reasons we will discuss at another time. Good luck in all investment endeavors.
Your Friends At
Value Stock Players.com