Some Twitter investors got lucky

Twitter (“No Moat”) is now a bird of different plumage. Its shareholders should consider themselves lucky.

Less than 10 years after launching as a public company, the social media platform that promised to “serve public debate” is going private again. Its main mission seems to be to serve as a mouthpiece for its impulsive and energetic new owner, Elon Musk.

Twitter’s spell as a public company officially ended — at least for now — on Tuesday when its shares were delisted on the New York Stock Exchange.

While Twitter’s return to private company status has been an elaborate soap opera that looks like a circus, here are three lessons for investors from its tumultuous days as a publicly traded stock.

Income is important

Twitter got into this predicament because it never reached its potential as a public company.

It is unprofitable and lags behind its competitors – Meta Platforms, Snap, pinterest – in terms of growing its user base, attracting advertisers and increasing revenue.

The purchase price represents a 38% premium to Twitter’s closing price on April 1, which was the last day of trading before Musk disclosed his nearly 9% stake.

That it was able to bring a 38% bonus to its shareholders defies all expectations and relies on the whims of a billionaire.

Twitter went public in November 2013 at $26 per share and raised $1.8 billion from the sale of 70 million shares, although it has yet to turn a profit.

In its first day of trading, the stock jumped 73% to close the day at $44.90.

Twitter went private nine years later, on October 27, for about $10 more, when Musk paid $54.20 per share, or $44 billion.

This equates to a return of approximately 2% per year compared to an annualized return of 10% per year in the Morningstar US Market Index.

Even Musk, the world’s richest man with a net worth of $203 billion and the chief executive of electric vehicle maker Tesla, regretted his offer soon after making it official.

Musk admitted he was paying too much for Twitter when he discussed Tesla’s third-quarter earnings with Wall Street analysts in October, noting, “It’s a big thing that this kind of thing has gone down for so long period.” He added that he thought he had “incredible potential”.

Management issues

Managing Twitter is a study in dysfunction and distraction, and has long been a source of criticism.

In its short life as a public company, Twitter has had three different CEOs.

Co-founder Jack Dorsey was fired from the company twice, once when Twitter was still private in 2008 and most recently in November 2021 when activist investor Elliott Management called for more innovative products and better that management.

Elliott’s intervention was prompted by Dorsey’s intention in 2020 to move to Africa for six months and decentralize management.

Corporate governance is also important

Twitter seems like an easy acquisition target because its shares have long lagged peers in the stock market.

The company also struggled to expand its user base and attract advertising.

That said, another set of factors worked in favor of Twitter’s shareholders, even if they didn’t realize it: Twitter’s corporate governance was not the first to prevent a hostile takeover.

Corporate governance experts often object to corporate actions that make acquisition difficult because it takes decision-making out of the hands of the actual owners, the shareholders.

While a corporate takeover may be disruptive, it takes decision-making out of the hands of the actual owners, i.e. shareholders.

“Shareholders want the market to do its job, and when an offer comes in, the company’s shareholders are willing to sell as long as the price is right, and don’t want anything to get in the way of that mechanism,” Lindsey observed. Stewart. , director of stewardship research at Morningstar.

It was only after Musk offered that Twitter’s board adopted a poison pill, which would ultimately dilute Musk’s stake.

Another problem with Twitter that sets it apart from other media companies is the lack of a controlling shareholder that can serve to fend off activists and provide protection against takeover threats.

Dorsey, who owns 2.4% of Twitter and continues to own shares, also appeared to defend Musk’s offer.

Following the takeover offer, Dorsey tweeted, “Elon is the only solution I trust. I trust its mission to expand the light of consciousness. »

Meanwhile, Dorsey, co-founder and executive chairman of the payment processor blockformerly known as Square, is developing Bluesky, a new social media platform seen as a competitor to Twitter.

© Morningstar, 2022 – The information contained herein is for educational purposes and is provided for informational purposes ONLY. It is not intended and should not be considered an invitation or inducement to buy or sell the listed securities. Any comment is the opinion of its author and should not be considered a personalized recommendation. The information in this document should not be the only source for making an investment decision. Be sure to consult a financial adviser or finance professional before making any investment decisions.

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