The Overlooked Business Lesson in Elon Musk’s Twitter Takeover
Twitter’s Board first scoffed at Elon Musk’s offer, then sued to accept it, all because of an underestimated business principle that every founder needs to know.
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On its way out, Twitter’s board of directors gave a secret masterclass on the fundamental relationship between managers and shareholders. In 2022, board members at Twitter, now called X, which was a publicly traded company at the time, struggled to decide whether to accept an offer from Elon Musk to take the company private for $44 billion. Mr. Musk touted his offer as a significant overpay above the stock price at the time, but at first management made it clear they would do everything in their power to reject the offer and any subsequent offers.
Just one week later, they reversed course seemingly out of the blue, going so far as filing a lawsuit against Musk to force him to complete the takeover.
What caused management’s change in position? Although the reasoning of specific managers may never be known, their actions align with expectations given an age-old finance principle that every business owner should know.
The principle: ‘Agency Problem’
In corporate finance, the word manager means an agent shareholders hire to operate a business on their behalf. The goal of any public company is to operate with the best interests of its shareholders in mind, which means maximizing the profits that can be given back to those shareholders. When managers are hired, they are expected to make decisions that maximize shareholders’ wealth.
However, managers are not automatically shareholders, so it can be difficult to incentivize them to make decisions like shareholders. Unfortunately, sometimes managers are incentivized to make decisions that completely misalign with the interests of shareholders. Such misalignment is called the Agency Problem. This is why important managers often get stock options, so they are more incentivized to make decisions like owners.
In Twitter’s case, management’s reaction to a takeover bid should have been to compare the offer to profit and stock growth projections. If calculations showed the takeover price being higher than stock and profit projections, then shareholders’ wealth would be maximized by accepting the buyout, even if it caused personal losses for the ousted executives.
Did Twitter’s board follow this strategy?
Twitter’s managers did look out for shareholders
Musk’s plan to buy Twitter began with him quietly buying shares. By April 4, he announced that he had acquired over 9 percent of all Twitter shares. After declining a seat on the board of directors, which would have limited his ability to increase equity above 14.9 percent, he formally announced his offer to take Twitter private for $54.20 per share. Twitter’s board of directors likely did not expect Musk to do this, given that Musk’s team had previously ignored key SEC filing dates in a way that indicated Musk did not intend to use his shares to exert control over the company. At that point, management’s top preference was probably still for Musk to join the board of directors, although CEO Parag Agrawal’s reply when told Musk would no longer be joining the board was that it was “for the best.”
After receiving Musk’s offer, Twitter promptly filed to adopt a ‘poison pill’ arrangement where all current shareholders, excluding Musk, would be allowed to purchase additional shares, thus making Musk’s percentage ownership smaller and making it more expensive to finish buying all shares. Why was Twitter’s management initially unhappy with Musk’s $54.20 per share offer? They explained in their SEC filing that the “poison pill” was “to protect stockholders from coercive or otherwise unfair takeover tactics … by imposing a significant penalty upon any person or group that acquires 15 percent or more of the shares of Common Stock without the approval of the Board.” Although Musk’s offer was an overpay at the time, some analysts advised that Twitter stock was undervalued and that it might rise in the short term. For context, in 2021, Twitter stock reached a high of $77 per share, and even in October 2021, less than six months before Musk’s offer, Twitter shares were trading for around $65. Given that Musk missed his filing dates to disclose intent for control, and given the uncertainty about Twitter’s share price, it does appear reasonable for Twitter management to have wanted to stall for time and leverage via the “poison pill” filing while taking the time to reach a thought-out agreement. Although it’s impossible to know the full reasoning of management here, events are consistent with this line of reasoning. By April 21, Twitter seemed to abandon the “poison pill,” opting to negotiate with Musk. They reached an eventual deal on April 25 to be purchased for $44 billion, partially attributed to pressure from shareholders who didn’t believe stock prices would rise naturally above what Musk offered to pay. Musk himself created pressure, tweeting that “If the current Twitter board takes actions contrary to shareholder interests, they would be breaching their fiduciary duty. The liability they would thereby assume would be titanic in scale.”
They were by no means perfect
Just because Twitter’s management seemed to act rationally regarding the “poison pill” doesn’t mean they were completely free from wrongdoing. After the initial discussions in April, Musk spent months trying to cancel his original deal due to claims that management provided false information about the number of bot accounts on the platform. These allegations have some merit; they were reinforced by publicly available platform trends and a whistleblower report from a disgruntled Twitter employee. If true, it’s entirely possible that Twitter’s management could have withheld information in a way that inflated stock prices and the price Musk paid far above what they would have otherwise been.
The lesson for business owners
An important part of structuring every business is incentivizing managers to maximize the wealth of owners. The goal is not to maximize short-term profits, since long-term investments are often necessary to grow. If your business gives the wrong incentives to its managers, it could cost your business money, time, and efficiency.
Three ways to avoid the Agency Problem at your business:
1. Turn managers into owners through stock options.
2. Build oversight and audits into management structures.
3. Emphasize internal controls.
