Elon Musk’s attempts to purchase Twitter (NYSE: TWTR) have dominated news headlines over recent weeks. The Tesla CEO, and world’s richest person, built a 9% stake in the social media firm before launching a takeover attempt on 14 April that was approved by the company’s board of directors on 25 April.
Valuing the business at $54.20 per share, which equates to around $43bn for the entire company, his takeover represents a 38% premium to the firm’s share price on 1 April. This was the trading day immediately prior to him disclosing a 9% stake in the business.
Interestingly, Twitter’s shares continue to trade around 10% below Musk’s offer price. This suggests that investors remain somewhat cautious about the prospect of a deal ultimately being done. After all, there has been a substantial amount of disquiet from some Twitter users, as well as reports of dismay among some of the company’s staff at the prospect of having a new owner.
Will the Twitter deal go through?
Indeed, the idea that Musk’s Twitter takeover will ultimately fail has lingered for several reasons. The firm has a somewhat strained relationship with China’s government due in part to its handling of content related to protests in Hong Kong. The company, and its peers, removed accounts that they said were intended to cause political instability in the country.
Tesla, meanwhile, relies on China for around a quarter of its sales. The country could remain highly important to its future growth rate as rising income levels and a pivot towards electric vehicles create long-term opportunities for the firm in the world’s second-largest economy. Therefore, it could be argued that Musk’s proposed takeover of Twitter could affect Tesla’s prospects in China.
Meanwhile, Tesla’s share price has fallen by around 15% since the Twitter takeover was launched. Investors appear to be concerned that Musk may sell part of his stake in the electric vehicle manufacturer following the acquisition. Although a recovery in Tesla’s shares is not guaranteed if the Twitter acquisition does not proceed as planned, the prospect may encourage Musk to walk away if the acquisition process does not go smoothly.
A disappointing performance
Of course, Musk’s acquisition is currently set to go ahead after being approved by Twitter’s board of directors. He has the required financing in place and has stated that he is seeking to buy the firm because he values its capacity to facilitate free speech, rather than to necessarily make a profit.This may be just as well, since Twitter’s recent financial performance has been relatively disappointing. The company released what could be its final quarterly trading update this week, which missed revenue expectations. It showed a rise in revenue of 16%, but the firm also experienced an increase in expenses of 35%. This meant its operating loss was $128m versus a $52m profit in the same period of the prior year.
Indeed, Twitter has struggled historically to translate its vast global profile into consistently high and growing profitability. Even looking out two years to its 2024 financial year, the firm is forecast to generate earnings per share of just $0.37. This puts it on a forward price-to-earnings ratio of 130 at its current price. As a result, it may not offer good value for money for its new owner.
