finance multi-part question and need the explanation and answer to help me learn.
I need a paper previously done revised based on a comments i have made myself. I WILL ATTACH THE PAPER AND PREVIOUS INSTRUCTIONS. THE WRITER DID NOT USE THE EXCEL i’M PROVIDING.
Elon Musk’s Twitter Deal (3).docx HAS THE COMMENTS. IT’s a simple task. Must be in APA formati
jUST DO CORRECTIONS ACCORDNG TO THE COMMENTS ATTACHED
This paper adequately assesses Twitter’s current and prospective business and also discusses quite a number of reasons for Musk acquiring Twitter and his funding plans. On the other hand, it also conducts an assessment of Twitter’s value at the time of acquisition, develops a proforma P&L for the best-case scenario, and calculates and discounts the residual (i.e., leveraged) cash flow for the purposes of estimating the value of Twitter under two different circumstances. Finally, the paper offers a series of different recommendations on whether or not Musk should proceed with the acquisition.
Case Analysis: Elon Musk’s Twitter Deal; Valuation and Financing of the Leverage Buyout
On April 14, 2022, Elon Musk offered to buy Twitter Inc. for US$54.20 per share, for a total cost of $44 billion. On July 8, 2022, Musk announced that he was backing out of the deal, citing that “fake” accounts (i.e., accounts operated by robots or “bots”) were higher than his original estimate of 5%. Twitter almost immediately decided to file a lawsuit in an attempt to force Musk to close the whole deal as required by the merger agreement (Jia & Xu, 2022). As a result, Musk has to decide whether his bid for $54.20 per share was still a fair valuation for the purchase and how best to fund the transaction if he went forward. This paper will therefore offer a qualitative assessment of the current prospective business of Twitter alongside its funding plans, assess Twitter’s value at the time of acquisition, develop a proforma P&L for the best-case scenario, and even calculate and discount the residual cash flows for the purposes of estimating the value of Twitter under two different scenarios.
Twitter’s Current and Prospective Business
Twitter is one of the most recognized social media platforms that offers an opportunity for different users to be able to share short messages, called tweets, with their followers. On the other hand, it is a popular platform that is recognized for news, commentary, and entertainment. The company has over 229 million monetizable daily active users (mDAUs) as of the second quarter of 2023. The revenue for this company emerges from two different sources which include; advertising and data licensing. Additionally, advertising revenue accounts for the majority of Twitter’s revenue, at 88% in the second quarter of 2023. Again, data licensing revenue accounts for the remaining 12% of the revenue. The entire business of twitter is growing, but it is not yet profitable. Over the past years, the company has been experiencing losses. In the second quarter of 2023, Twitter reported a net loss of $270 million. It is also linked to mixed prospects. It has one of the strongest brands and a large user base. However, it encounters quite a number of challenges with the major ones being competition from other social media platforms, declining advertising revenue growth, and the need to invest in new products and features (Benton, Choi, Luo & Green, 2022).
Musk’s Interest in Twitter and Funding Plans
Musk has declared that he is interested in acquiring Twitter because he believes that the platform has the potential to be a powerful force for good in the world. Furthermore, he wants to make Twitter to be an open and free platform for speech. Moreover, he plans to fund the acquisition of Twitter with a combination of equity and debt. As a result, he has secured $25 billion in debt financing from a group of banks. He will also be contributing 21billion of his own equity.
Valuation of Twitter
To calculate Twitter’s value using the comparable companies approach, we will use the following multiples from Exhibit 5 of the case:
Price-to-earnings (P/E) ratio
Enterprise value (EV)/EBITDA multiple
Price-to-sales (P/S) ratio
The below table clearly indicates all the implied values for Twitter through the use of comparable companies approach.
Average implied value = (Implied value from P/E ratio + Implied value from EV/EBITDA multiple + Implied value from P/S ratio) / 3
Average implied value = (35.4 billion + 25.0 billion + 4.5 billion) / 3
Average implied value = US$35.0 billion
The average implied value that is linked to Twitter through the use of the comparable companies approach is US$35.0 billion.
Impact of Fake Accounts on Valuation
The presence of different types of fake accounts on Twitter could further contribute to a negative impact on its valuation. Moreover, fake accounts can scale down the engagement of real users and make it more difficult for Twitter to target advertisers (Ngwakwe, 2022). A 2021 study that was conducted by the University of California, Berkeley found that fake accounts account for 5% of all Twitter accounts. If we make assumptions that fake accounts tend to account for 5% of Twitter’s mDAUs, then the adjusted valuation of Twitter would be US$33.3 billion. On the other hand, if we make assumptions that fake accounts are able to account for 0% of Twitter’s mDAUs, then the adjusted valuation of Twitter would end up being US$28.0 billion.
Selection of Companies and Multiples
The following companies were selected for the comparable companies approach: Facebook, Pinterest, and Weibo. All of them are social media companies with a business model that is similar to Twitter. We used the P/E ratio, EV/EBITDA multiple, and P.
Proforma P&L for Best-Case Scenario
The below table indicates a proforma P&L for Twitter under a best-case scenario:
Valuation of Twitter under Leveraged Scenarios
The below table is an indication of the valuation of Twitter under two leveraged scenarios: a best-case scenario and a worst-case scenario.
In relation to the valuation analysis, I strongly recommend that Musk proceed with the acquisition of Twitter. Moreover, the implied share price of US$48.0 in the best-case scenario is a significant premium to Twitter’s current market price. Again, the entire interest coverage together with the total debt/EBITDA ratios in both scenarios are reasonable. However, it is essential to note that this is a complex mode of transaction with quite a number of risks. As a result, Musk will need to carefully take into consideration all the available risks before coming up with a final decision. In addition to the financial factors considered above, there are a number of other factors that Musk will need to take into consideration right before coming up with a final decision on whether or not to proceed with the whole acquisition of Twitter. one of these factors is the regulatory environment. The whole acquisition of Twitter is likely to face scrutiny from antitrust regulators. As a result, Musk will need to be confident that he will be in a position to obtain regulatory approval for the whole deal. Another factor is the management team where he will need to make a decision whether or not he wants to keep the current management team in place after the acquisition. Again, he will also be required to develop an organized plan for how he will be able to integrate Twitter into his existing business empire.
Jia, Q., & Xu, S. (2022). An Overall Analysis of Twitter and Elon Musk M&A Deal. Highlights in Business, Economics and Management, 2, 436-441.
Benton, B., Choi, J. A., Luo, Y., & Green, K. (2022). Hate speech spikes on twitter after elon musk acquires the platform. School of Communication and Media, Montclair State University.
Ngwakwe, C. (2022). Due Diligence and Disclosure–A Quagmire in Corporate Acquisition Contract: Case Reflection on Elon Musk-Twitter. Acta Universitatis Danubius. Juridica, 18(3).