Elon Musk’s Twitter Deal Case Study

Foundations for Finance

OVGU Assignment: Elon Musk’s Twitter Deal Case Study

This assignment in attachment is voluntary, and you will receive a bonus point for submission and good performance. Please submit your answer report in PDF format, along with the corresponding Excel file in xlsx via elearning. Deadline: Feb 16, 2025 at 23:59

Q. Twitter, founded in 2006 by Jack Dorsey, Noah Glass, Biz Stone, and Evan Williams, launched its platform later that year. The company went public on the New York Stock Exchange on November 7, 2013. Unlike many other tech companies, which grant founders or early investors greater voting power through multi-class share structures, Twitter adopted a single-class share structure, ensuring all shares had equal voting rights.

On April 25, 2022, Elon Musk signed an agreement to acquire all outstanding shares of Twitter for $54.20 per share in cash, valuing the company at approximately $44 billion. Below is a timeline of key events related to the deal:

Twitter’s management argued that Musk’s offer undervalued the company.

Now please analyze this transaction. You can refer to Twitter’s 2021 10-K annual report, available on the SEC’s website at this link (https://www.sec.gov/Archives/ edgar/data/1418091/000141809122000029/twtr-20211231.htm).

Answer to questions below:

(a) Evaluate Twitter’s response to Musk’s takeover attempt. Could the company have taken a stronger takeover defense? If so, how?

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(b) Using the information provided in Twitter’s 10-K form, estimate a reasonable rev- enue growth rate and cost of capital for the company. Develop your estimates based on historical trends, market dynamics, and broader industry conditions. Some relevant data is provided in the accompanying Excel file, but additional in- formation may need to be sourced independently through online research. Clearly outline your assumptions of revenue growth rate and cost of capital and provide your reasoning to justify your chosen rates. Next, utilize the accompanying Excel valuation template to calculate Twitter’s value as of April 22, 2022. Analyze how sensitive the valuation results are to changes in the revenue growth rate assump- tions. Discuss the implications of this sensitivity when assessing the deal. Does this acquisition represent a good deal for Elon Musk? Why or why not?

Note: To simplify, assume

EBIT = Revenues ∗ Operating Margin; FCFF = EBIT ∗ (1− t)−Reinvestment;

Reinvestment = (Current Year Revenues − Previous Year Revenues) ×Sales-to-Capital Ratio;

Value of firm = PV(next five years’ FCFFs) + PV(terminal value)

where terminal value = FCFFyear5 × (1 + g)

(r − g) , PV (terminal value) =

terminal value (1 + r)5

and Value of equity = Value of the firm − Debt − Minority interest + Cash + Non − operating assets.

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