Activist company

Musk joining Twitter board raises questions about corporate plans

BRITTA PEDERSEN | AFP | Getty Images

Twitter announced on Tuesday that Elon Musk would join its board of directors. A day earlier, the CEO of Tesla and the world’s richest person revealed he was the largest shareholder in the social media company.

Beyond becoming the latest Silicon Valley drama, investors are trying to figure out what it all means for Twitter.

Twitter’s stock jumped 4% on Tuesday after the board’s announcement. On Monday, it had its best day since the company’s IPO in 2013, soaring more than 27%. But when it comes to Musk, markets are rarely rational.

“It’s nice when a company declares earnings – it looks much better if a company declares its association with Elon Musk,” said Howard Fischer, a partner at Moses & Singer law firm in New York and a former Securities attorney. and Exchange Commission. . “[Musk] it may not improve operations, it may not improve income, it may not reduce liabilities, but the stock market rewards [Twitter].”

Whatever the financial impact, one thing is clear: Seemingly overnight, Musk has been granted a greater grip on a company he regularly criticizes and uses to tweet to some 80 million people. subscribers, including many devoted members of the sect. of Elon.

Musk’s intent with Twitter is unclear, and it’s likely by design.

He has previously denounced Twitter’s content moderation policies, saying the company failed to uphold free speech principles. The Tesla CEO also pushed Twitter to create an edit button (a common complaint in the Twittersphere) and allow users to have greater control over the tweets they see in their News Feed.

“I suspect he’ll start off relatively slow, but then he’ll want to make some serious changes, probably more in the direction of free speech,” said Youssef Squali, an analyst at Truist Securities who recommends buying Twitter stock. . “I don’t think he ultimately cares about user growth etc.”

Twitter CEO Parag Agrawal and co-founder Jack Dorsey both welcomed Musk to the company’s board.

“He is both a passionate believer and an intense critic of the service, which is exactly what we need on Twitter and in the boardroom, to make us stronger in the long run,” Agrawal tweeted. “Welcome Elon! »

Musk disclosed his ownership of Twitter shares via a Form 13G with the SEC. This indicates that it is a passive interest, which often means the holder is not trying to control or influence the business.

But that could change. Going forward, Musk may choose to pursue active participation and a more aggressive role in the company. If he does, he will have to disclose it to the SEC in a Form 13D. In this case, he should state his intentions.

“Participation could become active at any time,” said Tom Hayes, chairman of Great Hill Capital. “I think Twitter is being proactive in putting it on the board before it demands it.”

The social media company has set some parameters for Musk’s appointment to the board, potentially limiting his influence. While Musk is on Twitter’s board, or 90 days after, he cannot own more than 14.9% of Twitter’s shares, either as an individual or as part of a group. , indicates the folder. Musk will be a Class II director until 2024.

“I think they set this condition because they don’t want [Musk] to have absolute control over the business,” Hayes said.

Twitter is no stranger to activist investors. In 2020, the company reached a settlement with Elliott Management after the hedge fund pushed for Dorsey’s ousting as the company’s CEO. The deal included a $1 billion investment from private equity firm Silver Lake and gave Silver Lake and Elliott seats on Twitter’s board.

Prakash Singh | AFP | Getty Images

Wall Street analysts have already started speculating what Musk might have in store for Twitter. More aggressive equity purchases? More seats on the board? What about a full redemption?

“Use your imagination,” Gordon Haskett analyst Don Bilson wrote in a note to clients on Monday. We have to wait and see “if Dorsey will like the idea of ​​Musk buying Twitter just like Jeff Bezos bought the Washington Post,” he said.

Hayes said he thinks Musk is unlikely to pursue something as dramatic as a reshuffle or a private takeover.

“He now has a significant financial stake in the company,” Hayes said, adding that there’s no reason Musk would want to take over the company as long as Twitter “executes his ideas.”

Musk could still campaign for a change in company policies. Last month, he polled his Twitter followers on whether the company “rigorously adheres” to free speech.

“Given that Twitter serves as the de facto town square, failure to uphold free speech principles fundamentally undermines democracy,” he tweeted. “What should be done?”

Musk, who has been known to attack journalists and others who criticize him and his company, has an unclear definition of free speech. He also accused the SEC of harassment in a calculated effort to ‘chill’ his right to free speech in its oversight of his communications with shareholders after a 2018 tweet suggesting he had secured funding to make the private enterprise.

If Musk sticks to his word on free speech, any drastic changes to Twitter’s image would likely create a much more controversial platform, Squali said. Controversy tends to attract consumers but repel advertisers, which the council should be wary of, he said.

Twitter has suggested that Musk and other members of his board lack the power to set company policies. “Our policy decisions are not determined by the board or shareholders,” a Twitter spokesperson told CNBC in a statement.

The spokesperson added that the company’s board of directors plays an important role in providing guidance and feedback “across our entire service”, but day-to-day operations and decisions are made by chiefs. and Twitter employees.

It’s also unclear how prominent Musk will be on the board. In addition to running Tesla, Musk is also CEO of rocket company SpaceX and Neuralink, a company that aims to develop implantable brain chips.

Fischer, the former SEC attorney, said Twitter management should be concerned that Musk will incur the wrath of the financial regulator, pointing to his high-profile disputes with the agency. Musk has a history of courting controversy and promoting his companies on Twitter, while rejecting some SEC rules.

“If I were Twitter, I’d be worried about it getting the attention of the SEC,” Fischer said.

Musk did not immediately respond to a CNBC request for comment.

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