Sep 16, 2023 - Economy

The “weird” sweetheart deals that helped Elon Musk and Masa Son close massive acquisitions

Illustration of a stack of hundred dollar bills with a small placard that reads, "Reserved" sitting on top.

Illustration: Aïda Amer/Axios

An obscure clause from the insular world of venture capital — the liquidation preference — has spilled over into at least two multibillion-dollar M&A take-private transactions where it really doesn't belong.

Why it matters: The two deals, while both exceptional in many ways, are a window into the kind of risk appetite that can be found among the ranks of the world's richest self-made men.

The big picture: Even multibillionaires don't have limitless amounts of money to play with. So when Masa Son wanted to buy Arm Holdings for $32 billion in 2016 and Elon Musk wanted to buy Twitter for $44 billion in 2022, they were forced to get creative in terms of how they were going to find the money.

  • That's where the liquidation preferences came in.

How it works: In venture capital, when a company wants to raise money at a higher valuation than investors want to pay, it sweetens the deal with liquidation preferences. The idea is to take the riskiness out of the stock by guaranteeing (as best the company can) that it won't ever fall in value.

  • A stock with less downside — or even guaranteed upside — is worth more, and so investors are willing to buy in at a higher headline valuation.

Between the lines: In both cases, the moguls were paying a "control premium" to own the company outright. That's standard in M&A transactions: If you're not willing to pay a premium, the shareholders have no reason to accept your offer.

  • Minority shareholders generally don't want to pay a control premium because they're not getting control. In a takeover bid, then, if the buyer needs to raise funds, they generally do so by borrowing the money rather than by finding other investors to buy a minority stake at the higher price.
  • Borrowing many billions of dollars can be difficult, however, if you've already maxed out your credit lines.

Driving the news: As Axios' Dan Primack reports, Elon Musk didn't particularly want to spend $1 billion on buying Jack Dorsey's 2.4% stake in Twitter, but Dorsey didn't want to commit to locking up $1 billion in Musk's Twitter.

  • Musk then gave Dorsey a liquidation preference: the right to sell his shares back at the original takeover price of $54.20 per share whenever he wants to. That was enough to entice Dorsey into the deal.

SoftBank's Masa Son was even more generous than Musk. In order to persuade Saudi Arabia's Public Investment Fund to take part in the Arm deal, he promised he would double the Fund's money in the event he sold Arm or took it public.

  • That's how SoftBank ended up buying the Vision Fund's 25% stake in Arm for $16 billion — an eye-popping $64 billion valuation — in the runup to an IPO that valued the chipmaker at just $52 billion.

Be smart: These terms are highly unlikely to be repeated in other M&A deals.

  • "This is not something I would expect to ever happen in a traditional private-equity or corporate M&A deal," says PitchBook analyst Kyle Stanford.

The bottom line: "The Arm deal was very weird because the Vision Fund is very weird," he adds.

  • "Elon and Masa always have something weird going on."
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