Elon Musk officially bought Twitter for $44 billion on October 28. It’s the largest leveraged buyout of a tech company, with $13 billion in debt from various investment banks. The billionaire must now generate enough income from the social network to be able to pay this sum in a difficult economic context.
Calculations are not good for Elon Musk
Debt is likely to weigh heavily in the management of a Twitter that has become a private company again. The social network has long struggled to generate sufficient revenue. For ten years he has only been a beneficiary for two years.
the wall street journal notes that interest owed by Twitter has so far been limited to $50 million per year. With the debt of 13 billion dollars contracted by Elon Musk, they could amount to 1 billion dollars annually. In 2021 the social network generated only 630 million dollars.
Twitter being a slow-growing company, the banks may not be as patient with the billionaire as on other projects like Tesla or SpaceX. Especially since the social network does not have assets to pledge and the banks themselves will have difficulty selling the debt to investors because of the economic context.
The threat of recession and inflation are also likely to weigh on Twitter’s revenue. The current anxiety is prompting advertisers to be cautious about spending. Enough to undermine Meta, Google, Snapchat and other technology stocks whose income is based on digital advertising.
Twitter will no longer have to worry about its share price, but 90% of its revenue comes from advertising. Musk’s image and his speeches in favor of unbridled freedom of expression could also appeal to brands. General Motors has already announced that it is pausing its spending on the platform.
The future of Twitter linked to its debt
To improve the profitability of his new business, Elon Musk should tackle a drastic reduction in his fixed costs. the New York Times recalls that sales and marketing expenses represent 1.2 billion dollars a year, as does the research and development division.
Most of its expenses are related to salaries. Prior to the takeover, an investor reported that Elon Musk planned to lay off 75% of Twitter’s 7,500 employees. Information denied by the owner of Tesla during his office visit on October 26. Massive layoffs would still be imminent. Executives would have been invited to draw up lists of positions to be eliminated.
This race for profitability could affect the social network’s investments, even as Musk dreams of making the platform a super app, wants to fight against bots and other ambitious projects. It will be difficult for the billionaire to dip into his own fortune estimated at 200 billion dollars. It is mainly made up of Tesla shares, the value of which has fallen by 40% in 2020. The issue of Twitter’s debt risks hampering the billionaire’s room for maneuver and encouraging him to raise additional funds quickly. His aura of an entrepreneur capable of redressing situations deemed hopeless still plays in his favour, but for how long?