OPINION | Elon Musk’s big problems with Twitter By Andrew J. Masigan READ:
By Andrew J. MasiganAfter months of negotiations, Elon Musk finalized his acquisition of Twitter on Oct. 27. The price? A whopping $44 billion.
An LBO works to Musk’s favor in three ways. First, using borrowed funds preserves Musk’s personal liquidity position. Second, he gets to acquire Twitter without surrendering his personal assets as collateral. Third, interest payments are borne by Twitter and booked as an expense. It lowers Twitter’s taxable income.
Last year, Twitter booked a net cash flow of $630 million wherein its interest expense amounted to only $50 million. With its new $13-billion debt load resulting from the LBO, Twitter is now saddled with interest expense amounting to nearly $2 billion, way above its net cash flow last year. Twitter’s cash reserves of $6 billion prior to the buy-out are also running low. All these will lead Twitter to a liquidity crisis.
To raise revenues, Musk launched Twitter Blue, a premium subscription service that elevates conversations on Twitter. A subscription fee of $8 is charged to those who opt-in to the premium service. The program was a flop with dismal subscriptions. Twitter is also a mature business model that faces slow growth. And unlike a property or manufacturing concern, it is bereft of large fixed assets like land and machinery to offer as collateral to banks.
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