Elon Musk’s acquisition of Twitter has become the most problematic buyout financing deal for banks since the 2008 financial crisis, according to a report by The Wall Street Journal. The primary issue revolves around the $13 billion in loans he secured from seven banks, including Morgan Stanley, Bank of America, and Barclays, to fund the takeover. Typically, banks offload such loans quickly to minimize balance sheet risks and collect associated fees, but these loans have remained on their books for 22 months, the longest period since the Great Financial Crisis. This unusual delay highlights the severe complications banks are facing due to the underperformance of Twitter, now rebranded as X.
Financial Burden on Banks
The initial attractiveness of the deal stemmed from Musk’s reputation and immense wealth. However, the financial performance of Twitter has been dismal, making it challenging for banks to offload the debt. Some lenders have had to significantly write down the loan values. This persistent burden has limited their financial flexibility, impacting their ability to fund other mergers and acquisitions. For example, the stagnation in loan sales has diverted resources and attention from other potential deals, creating a bottleneck in the market. Moreover, the looming threat of a $2 billion loss if X cannot repay the principal upon loan maturity adds another layer of financial strain.
This predicament extends beyond just the loss in loan value. It has also had a material impact on banker compensation. Some M&A bankers have experienced a staggering 40% reduction in pay in 2023 compared to the prior year. Such pay cuts not only affect individual livelihoods but also erode morale and productivity within banking institutions. Additionally, banks are receiving substantial interest payments from these outstanding loans, which offers some relief. However, this is not enough to compensate for the broader financial inflexibility and risks posed by holding onto these loans long-term.
Struggling Financial Health of X
Despite Musk’s controversial efforts to revamp and cut costs at the company, X’s financial health continues to struggle. The platform’s revenue for the first half of 2023 was $1.48 billion, a 40% decline from the previous year. Such a steep decline in revenue makes it increasingly difficult for the company to meet its financial obligations, further complicating the banks’ ability to recoup their investments. This revenue slump reflects broader issues within X that go beyond operational inefficiencies, indicating potential structural and strategic misalignments that Musk’s interventions have yet to address.
Lessons for Future Mergers and Acquisitions
In summary, Musk’s Twitter takeover has placed a significant strain on the participating banks, illustrating the risk inherent in large-scale leveraged buyouts, especially when the acquired entity fails to perform as expected. The situation underscores the importance of financial stability and the challenges associated with high-profile mergers and acquisitions. This case serves as a stark reminder of how even high-profile personalities and reputed financial institutions are not immune to the pitfalls of aggressive, leveraged buyouts.
