Twitter, Tesla and Musk: Enter China
The story is just getting started
Musk made an abrupt decision on Monday evening to surrender his legal battle to get out of the Twitter deal. I explain my theory why this happened at that moment.
The de-facto spokesperson of the Chinese regime makes a somewhat cryptic comment that could be interpreted in a multitude of ways, none any good.
With Musk owning Twitter and Tesla having its largest factory in China, this puts Musk in a position of extreme geopolitical peril.
China could lean on Musk in a way that nobody in the US government would like.
My conclusion: Musk will want to off-load his ownership interest in Twitter as soon as possible. Expect him to sell Twitter immediately after acquiring it.
What is left to say about what may be the biggest drama in all of Mergers & Acquisitions history? Turns out, a lot.
Whereas the opening chapter in this drama may be nearing a close as of this writing -- early Wednesday morning, October 5 -- an even bigger high-stakes game is just getting started, and it could have the most radical consequences for Twitter (TWTR), Tesla (TSLA) and its main figurehead, Elon Musk. Let me explain.
First, let’s set the stage with the drama that began to unfold over the last 24 or so hours: The surrender. Elon Musk, through his lawyers, sent a letter to Twitter and its lawyers on Monday evening, essentially waving the white flag: No negotiation, just close per the original terms. If one is to believe David Faber on CNBC, there are no obstacles to closing the Twitter acquisition within a few short days, not even a week.
That assumes that Musk had funding secured, however. Was there anything that happened on Monday evening that rocked Musk’s boat?
There has been plenty of talk about Musk wanting to avoid being deposed in a few days from now. Yes, that is a possibility, but the fact that Musk was going to be deposed had been known since the beginning of this case -- July -- and Musk had been deposed in other legal matters before without any undue drama.
There was other talk about very bad things coming up in other kinds of discovery -- hidden messages, failure to produce incriminating statements, and so forth. All of those possibilities are entirely possible to have caused Musk’s legal surrender at this time, but we cannot know any of those things for sure. They are somewhat likely scenarios, but also not something you can point to as a fact.
Elon Musk inserts himself into solving the Russian-Ukrainian war
There is one Occam’s Razor explanation of sorts, however, and that is the other thing that happened, out of the blue, on Monday evening: Elon Musk’s various proposals for solving the military conflict that is raging inside Ukraine. You can look at his Twitter feed on Monday, and it was a wild one -- in terms of the response from all sorts of parties from all over the world.
I am one of those who think that Elon Musk’s proposals were constructive and rational, much overdue and needed in this time of escalating military operations. However, judging from the responses on Twitter by people of prominence, mostly in the US and in Europe (not in China, and I’ll get to that below), I may be in the minority. Many people took great offense to Musk’s attempts at brokering a peace agreement between Ukraine and Russia.
How does this relate to Musk surrendering regarding the acquisition of Twitter, you may ask? I think the most likely angle is that one or more of Musk’s equity co-investors disagreed with Musk’s Ukrainian proposals as a political matter, and basically said that they don’t want to co-invest in Twitter with Musk.
If that happened, it would pose a huge and escalating problem for Musk. He was already widely believed to have to sell a few more shares -- it’s debatable how much -- of Tesla or some other asset (SpaceX comes to mind) in order to close on the Twitter transaction.
Maybe the estimated amount was small. Gary Black, who is a Tesla shareholder and prominent fund manager widely considered to have a good grasp on the math behind how much incremental money Musk would need, had been saying Musk needs an extra $2 billion since August. Now he changed that estimate to somewhere between $2 billion on the low end to $5.4 billion on the high end:
The problem with that calculation is, among other things, the assumption that Musk’s equity co-investors remain in the deal. If one or more of them bail out now, Musk will need to make up the difference.
Even if you are the world’s richest man, and can’t sell Tesla shares until after you file the 10-Q for the September quarter, coming up with a friendly bridge loan to cover $2 billion may not be something you can snap your fingers and make happen within 24 hours. Witness that there is no new or final agreement following Musk’s surrender letter -- at least as of this writing early Wednesday morning.
If you have to find a bridge loan for the upper end of Gary Black’s estimate -- $5.4 billion -- then it is even more difficult. Perhaps someone like Larry Ellison would spot you for a month, perhaps not.
Now add the potential problem of one or more equity investors bailing out, whether because of Elon’s Ukrainian peacekeeping proposals or some other reason. Suddenly, this is not only a problem in itself. It is something that could snowball, both mathematically and psychologically.
I believe this is why Musk decided, abruptly, on Monday evening to put a stop to this matter before his Twitter equity co-investors bailed and forced him to strain his ability to actually close on Twitter -- whether before a trial, or after. Musk had taken the matter to the brink, and of all strange and unexpected things, his Ukraine commentary may have been a millimeter away from pushing the whole matter over the edge. There was therefore no time to waste -- surrender immediately, and move on!
From the frying pan into the fire
Let’s assume that Musk finds a way to close the Twitter transaction, having stopped any bleeding just in time to keep the financing together, all is then good, right?
No. All is not good.
First, Musk fought Twitter in order to buy it. Then, Musk fought Twitter in order to not have to buy it. Now, Musk would own Twitter so what will be the next fight?
It turns out that China may be the squeaky wheel that could exploit Musk’s Twitter ownership for its own advantage as it battles the U.S. for geopolitical supremacy. Let’s turn immediately to the de-facto spokesperson for the Chinese regime -- as published on Twitter, of course!
Elon Musk has released his personality too much, and he believes too much in the US and West’s “freedom of speech.” He will be taught a lesson.
-- Hu Xijin, October 5, 2022
I confess that I am far from sure what the Chinese regime’s de-facto spokesperson means by this statement, but I am pretty sure it is nothing good.
What does Hu Xijin mean precisely by this? Does he mean that the US and its (NATO) allies will teach Musk a lesson? Or does he mean that China will teach Musk a lesson? And if so, would China teach Musk a lesson for doing what precisely? It is possible to interpret this in many ways. One thing is clear: China wants something from Musk, and it’s not a bunch of electric cars rolling off an assembly line.
With that in mind, let me cut straight to the chase and offer my interpretation of Musk’s new China-Twitter problem. Let’s start by listing the two facts:
Tesla has its biggest factory world-wide in China. If it were to suffer a problem, as happened this May 2022 with the lockdowns, Tesla’s financial results suffer and with it Tesla stock.
If and when Elon Musk comes to own Twitter -- now seems like almost 100% certain -- he is in control of the greatest public debate apparatus on Earth. Twitter *is* the global town square (Okay, it is banned in China, but you get my point).
Now put two and two together. Elon Musk, through “his” company (He is the largest shareholder) -- Tesla -- is totally beholden to China with the factory in Shanghai. Now Musk is also in control of the world’s “free speech” platform. What could possibly go wrong?
There are now a long list of Chinese domestic electric car companies, dominating the Chinese car market. Tesla’s share of the Chinese market is a relatively small percentage. For the year to date where we have comprehensive data -- January through August 31 -- Tesla had 7.1% unit market share among EVs in the Chinese market:
https://cleantechnica.com/2022/09/23/china-electric-car-sales-30-share-of-auto-sales-in-august/
Basically, from China’s standpoint, Tesla is expendable. China would rather its long list of 100% Chinese owned automakers assume Tesla’s role as electric car champion, and lead China’s export efforts as well as domestic supply. Therefore, even without Twitter, Tesla’s position in China was becoming politically precarious.
With Musk owning Twitter, however, suddenly China has a new form of leverage. There are a multitude of things China may want out of Twitter, as a wish-list: User data, DMs, content moderation policies, you name it. How about people stop criticizing the Chinese government? How about user data on prominent American politicians, businessmen and military personnel prone to blackmail? Put yourself in the shoes of the Chinese intelligence services for a moment.
No pun intended, but you don’t have to be a rocket scientist to figure out where this is going: China might tell Musk as follows: “Nice little car factory you have here in China. It would be sad to see something happen to it.”
In other words, Musk owning Twitter is basically a U.S. national security risk as a result of Tesla’s factory in China. I think Musk knows this, and it may have been a silent reason that he changed his mind about wanting to own Twitter, within barely a week of signing the deal to acquire it.
Step number 3: Musk to sell Twitter
Step number one was Musk’s fight to buy (or not to buy) Twitter. Step number two will be the final takeover and initial ownership of Twitter, which may include China putting pressure on Musk to do whatever China wants, or else. As a result, I think there will therefore be a swift step number three: Musk will want to sell Twitter as soon as possible. I imagine he’s already planning for it.
If Musk keeps Twitter, he will be caught in the geopolitical war of supremacy between the US and China. It will make him a victim, because each side will lean on him, and view him with the utmost of suspicion that he is really playing for the other team.
From the Chinese side, Musk has a computer on four wheels with microphones and cameras, plus he owns SpaceX and is a US Department of Defense and NASA contractor. From the US side, Musk is susceptible to Chinese blackmail because if China does anything to slow down production at his factory in China, they can drive Tesla basically out of business and more importantly Tesla’s stock to zero -- unless Musk does what China wants as it pertains to Twitter. That’s total leverage.
For this reason, it will be in Musk’s interest to off-load Twitter immediately. My guess is that there will be an agreement in place for him to sell Twitter to someone -- anyone! -- before this year draws to a close. Musk can’t afford holding this hot Twitter potato. As he found out with his insertion into Ukrainian peacekeeping, Musk does not blend well in such a position at the crosshairs of US foreign policy -- whether it is facing Russia, or facing China.
Impact to Tesla stock: Negative
For the next few days and weeks, these issues could be bad times for Tesla stock. Musk’s potential need to sell Tesla stock, as well as any pressure that the governments of both China and the US may bring to bear as a result of Musk owning Twitter, appear to have more downside than upside for Tesla shareholders, at least short-term. As a result, I am particularly bearish on Tesla stock for the short term, days or weeks.
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At the time of submitting this article for publication, the author was short TSLA and long TWTR. However, positions can change at any time.