Oct 26, 2023 - Economy

Elon Musk knew he made a bad bet on Twitter. He was right.

Photo illustration of downcast Elon Musk wearing a party hat and blowing a party horn.

Photo illustration: Aïda Amer. Photo: Ludovic Marin/AFP via Getty Images

Friday is the one-year anniversary of Elon Musk's $44 billion takeover of Twitter, which he subsequently renamed X.

The big picture: Musk gets to benefit from the long-term nature of private equity. Which is good for him because, in the short term, this deal has been a steaming pile of blue bird poop.

  • Musk's acquisition isn't popularly viewed as a private equity deal, given that its majority investor isn't institutional, but that's exactly what it was.
  • Highly leveraged and heavily lawyered, with a new owner who fired top management, laid off scores of others, and implemented a series of changes to fix what he saw as the company's core flaws.

By the numbers: Fidelity, one of Musk's equity co-investors, marked down the value of its Twitter shares by 61.43% through the end of August. Banks are expected to take a 15% discount on debt they've thus far been unable to unload, per the WSJ.

  • Global app downloads fell by 38% between October 2022 and September 2023, and even steeper in the U.S., according to Sensor Tower estimates.
  • Monthly active users are off 14.8% globally on Android and 17.8% for mobile users in the U.S., per SimilarWeb. Average daily time spent per user and global web traffic are also down, while user churn is up.
  • Musk last month said that the company's U.S. ad business was down 60%.

What to know: Private equity's business model relies heavily on cash flow, particularly as a means of satisfying interest payments. But X doesn't have positive cash flow, and Musk has shown that he has no clue when it might — despite all of his cost-cutting.

  • In March he claimed the company might be cash-flow positive in Q2, but then it wasn't.
  • CEO Linda Yaccarino in August said, "we're pretty close to break even," but six weeks later pushed back that prediction into "early 2024."
  • No way Bill Ackman is going to spend his SPARC absent cash flow.

Behind the scenes: X also continues to eschew responsible governance, which could stem at least some of its slide.

  • The company still doesn't have a board of directors, nor does it have a chief financial officer (instead, it has a senior director of finance who's been with the company for 11 years).
  • Sounds a bit like another highly valued private company with X in its name and whose founder is on trial for fraud...

The bottom line: Musk knew he made a bad, impetuous bet almost from the minute he made it, which is why he sued to cancel the deal.

  • There's still time to turn things around, but so far his moves have made it more likely — not less — that this will go down as one of private equity's biggest busts.
  • And perhaps an LP reckoning for the co-investors who loyally followed Musk onto a path he frantically tried to avoid.

Editor's note: This story has been corrected to reflect that Android usage, not mobile usage, worldwide was down 14.8%.

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