Musk/Twitter: bizarre equity offering provides vibes in place of value

The meme stock phenomenon has not ended. It has merely migrated. In 2020 and earlier this year, zombie companies such as GameStop inspired retail investors to rally on social media then drive up share prices.

Elon Musk can apparently create a similar vibe at Twitter. The app is now privately held by the billionaire entrepreneur and institutional investors. Its value has plummeted from the $44bn purchase price, stung by the advertising downturn and Musk’s erratic leadership.

Few CEOs could run an investment into the ground this quickly. Musk himself has, for example, broached a bankruptcy multiple times. Yet the Musk circus has an approving as well as a disapproving audience. Perhaps that alone can temporarily upend the natural laws of finance.

As if hoping to prove this, Musk has been marketing more equity. Even more remarkably, this has generated a modicum of interest.

Musk and co-investors committed $33bn of equity to fund the original deal. That was one reason banks lent $13bn. The so-called “equity cushion” was designed to absorb value degradation before debt. The latter is now stuck on the balance sheet of Morgan Stanley and others, on offer for 60 cents on the dollar. That means the equity cushion which would-be equity investors envisage adding to has already been incinerated.

Normally, new investors could simply buy Twitter debt at a discount and take over the company. That would leave little reason to consider buying common equity, let alone at the buyout price.

But perhaps buying equity really just represents the chance to attend an annual meeting with Musk, get a verified account and garner other psychic benefits that accrue from being in his club.

Musk, if he wanted to, could simply hand the keys of Twitter to his creditors. Tesla shareholders would prefer to have his attention again. Instead, he is selling billions of the carmaker’s stock seemingly to support Twitter.

It appears the billionaire is also willing to burn cash irrationally to remain in the clique of which he is the leading member.