Dividends and Tesla CEO has provided no clues about how he would raise funds to buy Twitter

In the world of Mergers and Acquisitions (M&A) there are rules which companies must follow otherwise the Securities Regulators and the public will think it is a shame. The rules say to announce a M&A is to have the available funds. If the company does not have the funds, one could easily think of scenarios where a company would buy shares in a company, announce a takeover at a higher price, the shares go in price and the first company dumps them or a pump and dump.

In an article by Laureen Hirsch of the New York Times News Service, although Elon Musk is technically the richest person in the world, most of his wealth is tied up in shares. Mr. Musk has made a offer costing $43 billion to take the public company Twitter private.

Earlier in April, Mr. Musk was going to join the Board of Directors but constitution or rules of the company say directors of the Board have a 15% cap on the amount of shares they can own. Mr. Musk bought about 9%.

Mr. Musk owns 1/5 of Tesla’s shares, but Tesla’s rules or constitution limits its executives to using no more than 25% of their stock as collateral for borrowing, and according to company filings, Mr. Musk has pledged a portion of his Tesla shares for other loans. If you follow or own shares in Tesla you would know the shares have fluctuated between $766 and $1,145 in recent weeks. Would a bank lend Mr. Musk on the valuation of the top value or the lower value?

Many Wall Street Banks offer bridging loans for M&A. Analysts estimate Mr. Musk would need between $15 to $20 billion, which would be added to Twitter’s balance sheet. Morgan Stanley typically does not do that size of loan, but could ask Bank of America, JPMorgan Chase to help. The downside besides interest costs is Mr. Musk and JPMorgan are not getting along. JPMorgan sued Mr. Musk over a tweet which Mr. Musk said he secured funding for the taking of Tesla private.

A third option is for Mr. Musk to ask private equity groups for help. One group that comes to the forefront is Silver Lake. The concern is the co-CEO of Silver Lake joined the Board and it can only acquire 5% of the outstanding shares.

Mr. Musk could try other private equity firms, however private equity typically want to buy companies with steady cash flow so debt can be arranged and the private equity can pay the debt with the cash flow of the company. Twitter has a negative cash flow of $370 million of the last year and very few cost cutting opportunities.

In the US markets, when people see one sided deals there are a variety of law firms which specialize in suing companies for money for all shareholders. The firms are watching the auction process.

In addition to the above, the company Twitter has the ability to adopt measures which do not help Mr. Musk unless he offers significantly more money.

Mr. Musk did receive funding from Morgan Stanley and other banks. He asked some billionaire friends to invest as well for $7 billion including Larry Ellison of Oracle and Al Waleed Vin Talal Al Saud of Kingdom Holdings and others who were early investors in Tesla.

Linking to dividend paying stocks, all companies have constitutions and rules which allow they to act to possible friends and enemies among shareholders, if the Board can not count 50% of the vote plus one. The steady cash flow of profitable companies is what makes they attractive to existing shareholders and new ones which is a very good position to be in. The steady cash flow allows existing shareholders to continue to have a reasonable rate of total return as well as other companies examining their operations to see what could and can be better. As long as there is high interest, there is high value in owning the shares.

There are more questions than answers, till the next time – to raising questions.

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