Why Elon Musk Wanted to Take Twitter Private
The Twitter Acquisition
In late April, Elon Musk made a $43 billion offer to purchase Twitter. The tech magnate had previously invested some $5 billion to secure a 10 percent stake in the company, but he now wanted to own it outright, saying in a letter to Twitter’s board chair:
I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy.
However, since making my investment I now realize the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company.
Musk was so high conviction about the need to take the company private that he suggested he would have to “reconsider [his] position as a shareholder” should the board not accept his offer. Some spectators took this as a veiled threat, a warning that, if he couldn’t purchase Twitter in its entirety, he would liquidate his current stake in the company and send its stock price crashing.
However, there is a more charitable explanation for Musk’s statement: he honestly believed that he could not make the necessary reforms to Twitter as long as it remained a public company.
There are good reasons to accept this interpretation, as Musk has a long track record of keeping or attempting to take his companies private. A few years ago — in a move that would land him at the center of an SEC investigation — Musk announced that he intended to take Tesla Motors private, claiming that he already had “funding secured.”
Musk has chosen to keep SpaceX - the most ambitious and speculative of his ventures - private, saying in a 2013 email company-wide email, “Per my recent comments, I am increasingly concerned about SpaceX going public before the Mars transport system is in place.”
Internal correspondences at most companies don’t concern decades-long, civilization-redefining plans, and this is precisely why Musk cannot take SpaceX public. Privately held companies can maintain a longer-term orientation than publicly traded ones.
Much has been said about the merits and nature of Elon’s proposed reforms, but these topics go beyond the scope of this piece. Instead, we’ll focus on the question of why Musk believes these reforms depend on his ability to take Twitter private, rather than trying to influence its direction in its current, public form.
Orienting Forces in Markets
Publicly traded companies are subject to rules, scrutiny, and external pressures that their privately held counterparts are not.
Investors.Gov, a site maintained by the SEC, advises the Securities Exchange Act of 1934 requires “companies with more than $10 million in assets whose securities are held by more than 500 owners... [to] file annual and other periodic reports.”
In addition to annual and quarterly reports, “certain specific events” may trigger the need for a report, such as the sale or acquisition of assets, the acceptance of new financial obligations, and changes in leadership, according to SEC.Gov.
While it’s reasonable for investors to be kept apprised of developments at the companies in which they hold equity, the attention these reports draw can distract management from the more substantive operational aspects of running a company. Worse yet, leaders at these companies anticipate how the public will respond to various moves, and one imagines that this pushes them in a more risk-averse direction.
In 1981, representatives of Morgan Stanley attempted to convince Charles Koch to take Koch Industries public. Author Christopher Leonard argues that the reporting requirements and answerability to shareholders that come with being listed on public markets were the major factors that caused Koch to resist the overtures of investment bankers, despite the immediate payday he would have received as a result of the deal. These forces would have nudged the company’s leadership to think “quarter to quarter” rather than devising plans “on a timeline measured in decades.”
In Musk’s email to SpaceX employees, he argued vehemently against taking the company public, as some employees desired because they wanted the option to liquidate their shares. Musk argues that the advantages of doing so are overrated – any employee with sufficiently good prognostication abilities could make a fortune in other publicly traded securities, and any employee who attempted to capitalize on insider knowledge would be breaking the law.
However, the most interesting part of Musk’s reasoning concerned the disadvantages of exposure to public markets:
Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products.
One of the more pernicious drivers of market volatility is the practice known as short-selling, wherein investors “borrow” shares from a brokerage and then sell the borrowed shares in hopes that they can pocket the difference between the current share price and some lower future price.
Elon Musk notoriously hates short-sellers. He has publicly opined that the practice is immoral and creates bad incentives. Jack Steward of Wired writes:
But the thing that makes Elon Musk so mad is that short sellers are motivated to find and spread negative information about the company. The worse the company performs, the more money short sellers make.
More generally, there is evidence that a myopic focus on short-term returns has damaged the American economy. In 2019, the Project for Strong Labor Markets and National Development, led by Senator Marco Rubio, released a report titled American Investment in the 21st Century. It examines why patterns of capital allocation have moved away from productive investments in the real economy and towards financialization.
According to the report:
Net private domestic investment, or the total amount of private investment in fixed assets like equipment, machinery, or property after accounting for depreciation, fell from nearly a tenth of U.S. Gross Domestic Product (GDP) as late as the mid-1980s, to less than half of that amount by the end of 2018.
In other words, companies today invest far less to improve and expand their operations than they did 40 years ago.
Short-term returns are often most easily garnered by engaging in various forms of speculation and financial engineering rather than by undertaking the sort of long-term, capital-intensive projects that promote capital formation. Moving money around is often a surer and quicker path to profits than building a factory or developing a new product.
In short:
Absent forces that orient investment to other ends, markets intensify competition for the efficiency of existing resources, reducing the time horizon of investment due to rising pressure to secure short-term financial return.
Musk represents a major departure from this trend. He has remarked, “‘What’s the point of having a company at all? Why even have companies? A company is an assembly or people gathered together to create a product or service… and sometimes people lose sight of that.”
His criticism of the “MBA-ization of America” has been especially pointed, as he admonishes companies to “[s]pend less time on finance, less time in conference rooms, less time on Power Point, and more time just trying to make your product as amazing as possible.”
The threat of interventions by activist investors is one constraint on the behavior of publicly traded firms — one that tends to push in the direction of short-termism and financialization. Ironically, Musk himself is behaving as an activist investor in his effort to acquire and reform Twitter. However, as much as one may like what Elon is doing in this particular case, activist investing in general has likely been a net negative for the American economy.
In a paper titled “The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance,” researchers from Colombia Law School and Rutgers Business School argue that activist investors pressure corporate management to focus too narrowly on short-term returns at the expense of long-term growth. Further, even companies that are not currently contending with activist interventions must respond to the incentives these interventions have introduced. “For every firm targeted, several more are likely to reduce R&D expenditures in order to avoid becoming a target.”
For example, in 2014, Carl Icahn purchased a large stake in Apple. In a letter to his fellow shareholders, he argued that - rather than maintaining cash reserves for future R and D – the company should expand its share buyback program, describing the company as “overcapitalized.”
In fairness to Icanh, the company did keep an unusually large reserve of cash on hand, and he does express excitement about various new products in Apple’s pipeline, but it is a mistake to believe that groundbreaking products materialize irrespective of how companies choose to deploy their capital.
Of the major breakthroughs Icahn anticipates - the Apple watch, the Apple TV, and an Apple car – only the first (and least ambitious) two have been brought to market. And what of ideas even more ambitious than an Apple car?
One economist has suggested that Apple use its capital surplus to revolutionize education, and Tim Cook himself has said he hopes Apple’s greatest contributions will address the healthcare market. These are two of the three areas of the American economy most badly in need of disruptive innovation, and any breakthrough in either would necessarily be highly capital-intensive.
Further, leaders of public traded firms must now contend with a new orienting force that is generally misaligned with capital formation: Environmental, Social, and Governance (ESG) standards. These standards are used to direct capital allocation by large institutions, but their real purpose is to exercise political control over the private sector.
In a speech Peter Thiel delivered at a Bitcoin conference this year in Miami, Florida, he went so far as to analogize ESG standards to similar tools – such as social credit scores – used by the Chinese Communist Party, even rhyming, “ESG = CCP.”
Bizarrely given the company’s explicitly pro-environmental mission, Tesla has a relatively low ESG score. Fortune quotes “ESG expert” Michael Baxter as saying that ESG is a multifaceted metric, and while Tesla excels in the environmental impact component of the score, it falls short in “transparency, labor relations, adherence to governance,” and predictably “having a CEO who doesn’t send out random tweets.”
Sam Altman, CEO of OpenAI and former president of the startup accelerator YCombinator, recently tweeted advice to companies, “either have a strong culture and an important mission, or get taken over by The Current Thing.”
Tesla does have an important mission, and one imagines that a powerful culture has congealed within the company to advance that mission, but that does not fully insulate the company from ESG or any of the other distractions that come with running a publicly traded company.
Founder Control
There may be a place for public policy here. Strengthening SEC rules that constrain short-termist activist investors and leveraging tax, trade, and regulatory policy to bias the economy towards productive, non-financial activities would be steps in the right direction. But founders themselves have a role to play, and the most important interventions may involve insulating them from public capital markets.
In the last decade, some of the fastest-growing technology startups, such as Stripe, have remained private notably longer than was typical in the past. This is partly due to the ease with which they were able to raise capital from private sources, giving their founders an alternative to going public in the first place.
In a paper titled “The Throne vs. the Kingdom: Founder Control and Value Creation in Startups,” Noah Wasserman of Harvard Business School analyzed a large dataset of companies to confirm the hypothesis that there is a tradeoff between growth and founder control in startups. The primary mechanism that drives this tradeoff is that in order to raise money, founders typically have to sell equity and cede board seats to investors. Sometimes, this erosion of founder control even leads to the founding CEO being replaced altogether.
In one of the more famous instances of this phenomenon, Apple founder Steve Jobs was forced out of his company due to the growing friction between himself and CEO John Sculley, whom Jobs had handpicked to mentor him until he had gained the experience that the board felt was necessary to run the company himself.
A particular source of contention was Jobs’ desire to devote more resources to the Macintosh computer, the development of which Jobs had overseen. The Mac represented a major departure from the company’s flagship product, the Apple II, in that it featured a graphical user interface, the technology that allows you to use a mouse to click on icons rather than having to memorize and then type commands. Jobs wanted to go all-in on this breakthrough, whereas Sculley wanted to continue to squeeze revenue out of the Apple II for as long as possible.
Walter Isaacson writes that Sculley “found Jobs’s passion for tiny technical tweaks and design details to be obsessive and counterproductive… He wasn’t naturally passionate about products, which was among the most damning sins that Jobs could imagine.”
This is what Musk means by “MBA-ization.”
In recent years, as abundant venture capital dollars have chased a small pool of highly promising investments, founders have had more leverage and have been less likely to be replaced by professional managers.
The most notable case is Mark Zuckerberg, whose control over Meta (formerly Facebook) is guaranteed by a special class of stock and his prerogative as CEO to appoint a board member in addition to himself. As a result, Zuckerberg has been able to deploy billions of dollars in capital towards his “metaverse” projects. Whether or not they ultimately work out, large, company-reinventing bets drive growth, and they’re much harder to pull off in the context of weak founder control.
The importance of founder control itself suggests multiple policy interventions.
Proposals to tax unrealized gains on equity should be considered only with the greatest caution, as such a tax may serve less as a wealth transfer from the rich to the poor and more as a power transfer from the Steve Jobses of the world to the John Sculleys. Some of the reporting requirements on publicly traded companies could be reconsidered to avoid amplifying the natural short-termism of capital markets through regulation. Finally, speeding the flow of capital into private companies -- such as by relaxing accredited investor requirements — can help these firms avoid seeking public capital to begin with.
Returning to Musk, his previous ventures - namely Zip2 and Paypal - have positioned him so that he has vast personal resources and easier access to credit and investor dollars than most founders, allowing him to avoid the tradeoff between capital access and founder control.
He harks back to an older archetype for entrepreneurs: the industrialist. As Pat Buchanan writes in the Journal-Advocate:
With the “Robber Barons,” one could see a connection between the wealth of the Rockefellers, Harrimans, Carnegies and Henry Ford, and their contributions.
There was perceived to be a connection between the wealth of these men and their achievements. They were helping make America the most awesome industrial nation known to man.
Whatever one thinks of Elon Musk’s ventures, it is hard to argue he started a rocket company in pursuit of money alone. He started it because he had wanted to send a greenhouse to Mars, and after searching in vain for an economical way to launch this bizarre payload into space, he decided that he would come up with a way himself.
Such visions are often deeply personal and pro-social. They do not emerge automatically from institutional processes or from the vicissitudes of public markets.