How a year of Elon Musk created a $US30 billion hole for his Twitter backers

It’s not only Musk and his co-investors who are hurting. The banks that provided the debt for the deal – Morgan Stanley, Bank of America, Barclays, BNP Paribas, Societe Generale, Mitsubishi and Mizuho – haven’t been able to do what they would normally do and sell down their exposures. They have been forced to retain the loans on their own balance sheets.

If X is worth only $US15 billion, not only would the equity holders be wiped out, but the banks would also be facing massive, multi-billion dollar losses. Estimates that they would take a $US2 billion hit if they tried to offload the debt today appear extraordinarily generous when a highly sophisticated institutional investor believes it is worth almost $US30 billion less than Musk and his financiers paid.

Their forbearance probably relates to the absence of alternatives and to Musk’s vast wealth – he could, if he wished, or if push comes to shove, bail them out. In the meantime they’ve got capital tied up against a loan that looks very dicey and is, at best, high-yield junk.

Musk and his recently appointed chief operating officer Linda Yaccarino have been talking up the platform’s prospects, claiming advertisers are returning and the user base is growing.

While some advertisers have reappeared, most of the big US advertisers continue to shun the platform and those advertisers who have returned are spending much less than they once did, according to the agencies that track advertising spending. The former top five advertisers on Twitter are spending nearly 70 per cent less than they did pre-Musk. Traffic on the platform is down at least 14 per cent over the past year.

Musk’s pursuit of his version of free speech has shifted the formerly left-leaning balance of posts on Twitter towards the right on X.

His gutting of its content moderation capabilities has unleashed a cacophony of misinformation and disinformation, alienating advertisers and many of its former users, although Republicans and libertarians have applauded the shift and the return of formerly banned voices to the platform.

Loading

Musk still has grandiose ambitions for X. He is still pursuing a long-held vision of an “everything” app that is not only a town hall for conversations between users but is also a global payments platform that handles all of the users’ financial services, from remittances and credit and debit cards to savings, loans and securities trading. X has been granted money transmitter licences in several US states.

He also plans a video service to challenge YouTube, wants to compete with Amazon and LinkedIn and he and Yaccarino told X’s employees last week they also want to launch a news wire.

Musk told the X staff last Thursday that if a transactions involved money it would be on the platform, with users not needing to maintain a bank account, with the services being launched next year.

“It would blow my mind if we don’t have that rolled out by the end of next year,” he is reported to have said.

Having reduced the employee numbers of a much more limited service from 7500 to about 1500, whether X’s capabilities can match Musk’s ambitions is a relevant question.

While there are some successful “everything apps,” most notably in China, it is unclear whether there is any demand for one elsewhere.

Given how erratic X has been on Musk’s watch, would there be enough prospective customers willing to hand over management of all their finances to the platform? The financial services sector is densely populated and the history of much bigger tech companies than X (Facebook, Google, Amazon) trying to break into it isn’t encouraging.

Would people rather put their trust in Musk for their financial transactions or in JPMorgan Chase, or Barclays, or Commonwealth Bank?

Can X really compete against YouTube, or Google or Amazon?

Loading

Clearly, if Musk’s vision were to be realised it would take a lot more investment and far more employees just to transform X to the point where it had the capabilities to offer the services.

Is Musk going to personally fund what would almost inevitably have to be a multi-billion-dollar investment? He’s got the personal financial resources but is he willing to throw a lot of good money after the bad?

How would his banks respond if he greatly increased X’s costs ahead of any increase in revenues?

Musk told an audience at a TED talk last year that Twitter wasn’t a way to make money and that he didn’t care about its economics at all. He has certainly made good on those convictions.

The social licence to operate a financial services business and handle other people’s money is built on relationships of unquestioning trust.

If he wants X to be a trusted financial intermediary (along with all the other ambitions he has for it) he needs to stabilise the existing business and its user and revenue base and regain trust in the platform and its content. Those don’t, however, appear to be on his current list of priorities.