Twitter From Hell
As we collectively watch Elon Musk’s acquisition of Twitter, I get the sinking feeling that I’ve seen this movie before. In 2007, I was editor of the Los Angeles Times when Sam Zell, a Chicago real estate tycoon, engineered a $12 billion acquisition of the Tribune Company. About a year after Zell sealed the deal, the company tumbled into bankruptcy court. I fear Twitter under Musk could face the same fate, and that would really be too bad.
I am a First Amendment absolutist. I believe Musk’s idea to make Twitter the nation’s free speech digital town square is a crucial step in our evolving democracy.
Twitter already gives voice to people once shut out of traditional media, including many with whom I disagree. I think we should expand the national conversation, even though it will inevitably get ugly at times. Free speech in forums open to everyone lets the nation see itself warts and all. We get hate speech but also insights. At some point, it will become glaringly apparent that Americans must shoulder the responsibility for judging the credibility of what they read. I fully recognize the danger of ceding to any single person so much influence over the national conversation. But I fear the lack of a forum even more. We have laws that can handle excesses, i.e., shouting “Fire!” in a crowded theater is not protected by the First Amendment.
Legal issues already devour much of Musk’s time, including those in a Delaware court where Tesla shareholders are challenging his pay package. Yet even billionaires are not immune to the laws of economics. Musk simply paid too much for Twitter and I think he knows it. He now owns it as a private company, and can do as he pleases, being the principle shareholder. He’s also saddled the company with enough debt that it’s a prime candidate for a Zell-like bankruptcy. I wrote a book about the Zell fiasco called The Deal From Hell. It was aptly titled.
There are, of course, vast differences between the two deals. Zell and Musk are as different as a Chevy and a Tesla. The total price tags on the deals differ in scale, too. Musk paid $44 billion for Twitter, an alternative news site, while Zell paid about $11 to $12 billion for Tribune, which at the time owned the nation’s best collection of daily newspapers. Zell structured his deal with $11 to $12 billion in bank debt for a company he valued at $16 billion whereas the Musk deal involves $13 billion in debt.
But there are some similarities between the two deals that give me the willies, and not just as a Tesla stockholder.
They both share some traits. Sam has a soft voice and calm demeanor. But he can also be abusive and profane. I’ve never met Musk, but he comes across as a giant with a megaphone and he seems to relish insults and boorish behavior as much as Zell. Both men enjoy controversial, swashbuckling entrepreneurial reputations and defy political correctness in deeds and words.
Another thing they have in common is money. Dollars form their yardsticks of success. They make a lot and borrow a lot. Bankers covet doing deals with the Musk’s and Zell’s of the world. The bankers can make loans, collect fat fees, and then peddle them off to institutional investors like pension funds on what’s known as the secondary market. When Zell started to line up the $11 to $12 billion to do the Tribune deal, bankers initially licked their chops at getting a piece of the action, if only to get an oar in the water for potential future deals.
Even though Musk tried to wiggle out of the Twitter deal, he had no problem lining up investors and bankers to help him finance it. But some of the problems that doomed the Zell deal are now surfacing in the travails of Musk.
The less significant issues are financial. Before Zell could close the Tribune deal, his bankers struggled to sell the loans on the secondary market. The economics had changed significantly. The nation was about to the enter the punishing recession that started in 2008, and many of the bankers wanted to renege on their commitments. Unfortunately for the banks, Zell and his lieutenants had locked them solidly into loans. Zell later said the banks had to swallow $400 million in losses after marking down the value of the loans
Bloomberg reports that Musk’s banks are now facing the same pressures. The deal that was is no longer the deal that is. Bankers are telling him that they can only get about 60 cents on the dollar for the loans, presenting them with a huge loss unless Musk can turn around Twitter. That’s not going to happen soon, though. Reports suggests advertisers and key employees are abandoning Twitter because of the chaos generated by Musk. Revenue, never great in the first place, is falling.
photo courtesy SpaceX
When deals with so much leverage (or debt) go south, they tend to do so fast, creating the need for a quick cash infusion. If a dealmaker can’t dig into his (and it’s usually his) pocket, he must search for a big company with a lot of cash, someone like BlackRock, the huge leveraged buyout company that manages more than $900 billion in assets. And the need for more cash exposes the problem that is now Musk’s greatest challenge.
While reporting for The Deal From Hell, one Tribune insider told me no one with deep pockets would come to Zell’s rescue because they had no faith in the CEO he had picked to run the Tribune, Randy Michaels, a radio guy who had as much business running a reputable news company as I have piloting the Space Shuttle. Faced with slim chances of raising more cash, Sam chose the option that best protected the creditors he cared about — bankruptcy court. He says he personally lost more than $300 million in the deal. But people like Sam have ways to minimize such a loss.
Musk has already dug into his own deep pockets to finance his deal. Most of Musk’s wealth is tied up in Tesla stock. Published reports say he’s sold $36 billion in shares of Tesla to finance his Twitter adventure. His 14 percent stake in Tesla still exceeds $200 billion and makes him the world’s richest man. But digging into his own pockets doesn’t bode well. So, the crucial question becomes: Who will be the credible leader for Twitter in the future? Who will be the CEO that can inspire public confidence?
If, like Zell, Musk chooses some clown to run the company, bankruptcy may be a better option for Twitter. Will Musk himself assume the lead Twitter position full time? He already runs the world’s most successful car company, SpaceX, the rocket company, and God knows what else. If he decides to continue “chewing the wires” at Twitter, he’d be stretching himself too thinly. If Musk truly believes Twitter is the crucial town square for free speech, then he will find someone good to run it — someone who is not the already overburdened Mr. Musk.
Sam Zell treated the Tribune deal like one of the real estate play he had mastered over the years. But serving the public by providing it with accurate news ran deep in Tribune’s DNA. Zell really didn’t understand that. Neither did his handpicked CEO, who mocked the company’s public service role.
Twitter, too, is a company that will rise or fall on its ability to serve the public. Musk, I believe, understands that. But will he be confident enough to pick someone credible to run Twitter, someone whose name is not Elon? Stay tuned for the next chapter.
—James O’Shea