Banks Realize Backing Elon’s Twitter Buyout Is Close To ‘The Worst Buyout Of All Time’
So we just wrote about how advertising on ExTwitter remains in freefall and is likely down between 75 and 85% from when Elon took over. And now the Wall Street Journal has a piece recognizing that the banks that financed about $13 billion of the $44 billion Musk needed are admitting that it may be one of the worst buyout deals of all time.
The headline of the article actually underplays the story, calling it “the worst buyout for banks since the financial crisis.” But that’s just based on the “hang” — the length of time the deal has remained on their books. You see, the way this normally works is that the big banks lend the money and then almost immediately turn around and sell off the debt to other suckers to deal with.
But, in the case of Musk and Twitter, the banks immediately rubber-stamped it on the basis of “Ooooh, that Elon, doesn’t he always make money?” and without doing much (if any) due diligence. The entities who would buy the debt actually care about the return (or lack thereof) and were quick to recognize that Musk was going to tank Twitter’s revenue potential.
Some of this was known before. Just as Musk was about to officially gain control of Twitter, it was reported that the banks were regretting their decision as they realized they couldn’t sell the debt. There was talk of them offering it to other investors for pennies on the dollar. Instead, they all just kept marking down the value of the debt.
To make matters worse for all involved, it has been reported that the banks agreed to a sell-down letter, preventing any bank from taking a deal that isn’t offered to the rest of them. But to make matters even worse for Elon specifically, he apparently promised the bankers they wouldn’t lose money on this deal. It’s unclear how binding that promise is, and Musk is somewhat infamous for breaking promises. But it certainly could impact his ability to borrow in the future.
That said, the WSJ article highlights that the banks have had to hang on to the (greatly devalued) loans for a record length of time.
According to data from PitchBook LCD, the Twitter loans have been hung longer than every similar unsold deal since the 2008-09 financial crisis for which the research firm has complete records. There were many more hung deals back then, but banks in that period typically were still able to sell or write off most of their hung debt within roughly a year after they issued the loans. One hung deal—a $20 billion all-debt acquisition in 2007—was bigger than Twitter but wound up in bankruptcy about 12 months after banks wrote the check.
Maybe the banks will think about due diligence next time? I mean, it was no secret that the basic ideas Musk laid out for how he was going to run Twitter were absolute nonsense from Day One.
But, while the headline and the beginning of the piece compare the performance of this deal to the financial crisis, they admit deeper in the article that it may just be one of the worst of all time:
Steven Kaplan, a professor of finance at the University of Chicago who has tracked such deals since the 1980s, said Twitter isn’t only the biggest hung deal by dollar amount since the 2008 financial crisis but one of the biggest of all time.
“The loans have weighed on the banks for much longer than other hung deals we’ve seen,” he said.
The article admits that many of the banks did the deal because they wanted to star-fuck Elon:
The banks that agreed to underwrite a deal that even Musk said was overvalued did so largely because the allure of banking the world’s richest person was too attractive to pass up, according to people involved in the deal.
The article notes that the banks that did the Twitter deal, such as Bank of America and Morgan Stanley, are now considered less trustworthy for such deals than the banks that stayed out, like JP Morgan and Goldman Sachs. And in some cases, the bankers who did the deal are seeing their (still massive) bonuses cut because of the deal:
Barclays’s top investment bankers on the mergers and acquisitions team were told at a New York dinner early last year that compensation for everyone in the room would be cut by at least 40% from the prior year. The bank had several hung deals hurting its performance but X was by far the largest, according to people familiar with the situation.
Once bankers were paid their bonuses for the year, about 50 of Barclays’s more than 200 managing directors left the firm, according to the people.
Maybe next time, skip the star-fucking and focus on the actual economics?