Elon Musk's proposed $44 billion deal to acquire Twitter and take it private is reportedly coming together as a court's October 28 deadline nears. Musk told his bankers he intends to complete the deal by then -- and his lenders have reportedly already begun funding the deal. If he doesn't, Twitter's lawsuit against Musk -- which seeks to force the world's richest man to stick to the offer he made in April 2022 -- will go to trial.
While most people are likely familiar with the idea of taking a private company public -- the process that allows individuals to buy and sell a company's shares in the stock market -- the reverse process is not as well understood and happens far less often. As a business and law professor, I have been analyzing mergers, privatizations, and other corporate deals for over two decades. The most common question I have been getting from students and faculty colleagues is why would Musk want to take Twitter private?
Or more simply, what does it mean to go private? The answers to these question help address a more interesting one: Will he succeed?
Public vs private
Let's start with the basic differences between a public and private company. For starters, a public company is widely held, meaning it has a lot of shareholders. Anyone can buy shares of most public companies, their shares trade on stock exchanges, and their market price is widely available on websites and apps.
A private company, on the other hand, is closely held. It has few shareholders -- sometimes just one. It usually is impossible to buy shares of a private company. When it is possible, it is difficult because shares don't trade on exchanges. You have to find someone who is willing and able under restrictive securities laws to sell you their shares.
Private companies have no meddlesome boards or rules governing compensation or other issues. And with few or no pesky outside shareholders, leaders of private companies don't have to worry about the effect their decisions might have on the share price.
Many, if not most, companies begin their lives as a private company -- perhaps in a family garage, as seems to be the case in so many startup origin stories. As a young company grows, it needs more funding, a problem often solved by doing an initial public offering that pulls in a lot of cash and opens up ownership to anyone. Taking a company private, as Musk intends to do, reverses the IPO.
A success story
So why would Musk or anyone want to take a company private? One key reason is control, which allows a buyer to impose his or her vision and singular strategy. Once the shares change hands, Twitter will be Musk's to do with as he pleases -- from reopening the accounts of former President Donald Trump and Ye to slashing the workforce by up to 75%, all of which he reportedly is considering.
That's why Michael Dell decided to take the computer company that bears his name private in 2013.
At the time, the company was struggling as personal computer sales slumped amid the rise of the smartphone. He said he couldn't make the transformation as a public company because it would hurt short-term profits, which would likely cause the share price to fall. That in turn could harm consumers' perception of Dell and lead to employee turnover. In other words, Dell's plan was perhaps too bold for a public company.
By 2018, when the company went public for the second time, Dell's stake was worth $32bn, with similar large payouts for his co-investors. The company thrived as well, with sales and profits soaring after a period of low growth, as Dell predicted. Work-forces often fall when a company goes private, but Dell's was up about 50% in 2020 compared with 2013.
A classic fail
But it doesn't always end well.
In the early 2000s, Toys R Us was in serious trouble. Although e-commerce was still in its infancy, it was beginning to disrupt brick-and-mortar retailers, increasing competition -- especially in the market for children's toys. A plan to sell its wares online via Amazon fizzled, leaving Toys R Us way behind in e-commerce. Meanwhile, its stores were growing old and shabby, customer service was lousy and Target and Walmart were gaining market share.
Also unlike Dell, Toys R Us never recovered. The significant debt incurred in the buyout saddled the company with large interest payments that left little money to invest in remodeling stores or building a competitive online business. Toys R Us filed for bankruptcy in 2017, 12 years after going private.
Does Musk have a vision?
So what does this all mean for Musk's potential success at Twitter? We still don't know a lot about what he plans to do. In his letter to Twitter shareholders, he said, “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.”
One could ask whether that is a business model or a statement of socio-political philosophy.
In any case, he said Twitter can't “thrive nor serve this societal imperative” as a public company. He's also tweeted that he would fight bots on the social network, let Trump and others rejoin and potentially let users pay bills via tweet -- part of his “Project X” super app idea.
More recently, The Washington Post reported that Musk plans to cut Twitter's 7,500 employees by about 75% -- though on October 26 he told Twitter employees in San Francisco that he wouldn't get rid of that many. Musk understood the physics of launching rockets and the engineering behind building an electric car, but he doesn't have deep experience running a social media platform or in building super apps. I believe he doesn't have a thoroughly thought-out strategy that fits Twitter's difficult environment.
With the company in his hands, Musk can, of course, do what he likes. He can implement any free speech policy that suits his fancy. He can let Trump and Ye tweet. He can ban Tesla short sellers and anyone who questions his foreign policy initiatives. He can fire 75% of his staff in a heartbeat -- something a public CEO would have a very hard time doing.
It's too soon to tell if taking Twitter private will be a Dell-like success or a Toys R Us disaster. But given Musk has said he “doesn't care about the economics,” it may not matter.
Erik Gordon is Professor of Business, University of Michigan. A version of this article previously appeared in The Conversation UK and has been reprinted under special arrangement.
