Holly's Blog: Twitter Twotter Twatter

Q. What do you get when you mix ego, personality, money, vision and social media? A. A $46 billion financing package for Twitter from Elon Musk. Yes, he wants to buy it.

So here’s the exam question today peeps. How does anyone rustle up a cool 46 billion Big Ones? Well. Like most of us scrabbling together some funds, you borrow some, you save up for some and you make some rich friends.

Musk has lined up $25.5 billion in debt. $12.5 billion of this is a margin loan from a group of banks. This means he basically says, “Look guys, I’m going to borrow a stink load of money, and if I can’t pay you back, you can sell my Tesla shares to get your money back.” A margin loan is borrowing money to buy things. With some collateral – just like your house secures the mortgage loan you have. Lovely if the thing you buy goes up. Painful if it goes down.

He has also said he will provide $21 billion of ‘equity’ for the deal.

Debt and equity explained in 60 seconds – imagine you’re a baker

All businesses need money to spend on growth – at least initially before profits fund growth. You can either raise money from ‘debt’. Or ‘equity’.

It’s actually not as complicated as it sounds. Imagine you set up a bakery and you need £50,000 to buy some ovens and flour, hire some people and rent a shop. Where do you get that £50,000?

Maybe the bank gives you a loan of £10,000. To be paid back in a year with an unfair disproportionately high interest rate. (Hello, banks).

And maybe a financial institution lends you £20,000. With an interest rate of say 5% (because you are a bit risky so they ask for a lot to compensate for the risk). This is all ‘debt’. (If you look on a pension statement, or at any mixed portfolio, you will see ‘bonds’ in there. Bonds are just debt, where effectively you are lending money to a company or a Government. In return for an interest rate or ‘yield’.)

That leaves you £20,000 short - which you can then raise as ‘equity’. You ask everyone you know – Mum, Brother, friends and the bin men – to give you some money in exchange for a piece of paper which confirms they own a smidge of your bakery. A share of your bakery.

So. If Elon is the baker, he has got Fat Cats to agree to lend him $25.5 billion. And they get some comfort in knowing that if he ends up on Struggle Street, they can sell some Tesla shares (about 85% of his stake) to get their well-manicured claws on the dough. And he has found $21 billion in his well-connected piggybank to give to Twitter in exchange for a piece of paper which says, You Own Us. ‘Equity’.

Why debt and equity?

Debt and equity appeal to different people. Debt is generally less risky for investors. If a company goes belly up and needs to sell the stationery and office furniture to try and repay investors, the debt lot are at the front of the queue. They get repaid first.

Equity holders (shareholders) get paid back last. But their potential return is not largely pegged to a % interest rate. Let’s say I own 10% of Musk Bakery. (eeeugh). I give him £100 when he values the business at £1,000. Which means I own 10%. Imagine he turns it into a business worth £1 million. Well then I am what is technically known as laughing because my 10% is now worth £100,000.

What next?

According to Twitter, the board is “committed to conducting a careful, comprehensive and deliberate review of the offer”.

Flipping heck. If someone offered me $46 billion for a business which made nothing, was largely populated by nasty people and cat videos, had a rather nebulous revenue model, and was the business which would get “Consistently fails to live up to her potential” on any school report, I would bathe in Bolli, sing Cyndi Lauper songs, hire Brad Pitt as a butler and run around screaming.

The world is full of armchair critics (mostly – ironically – on Twitter) who do nothing but moan and criticise without the cojones to actually try anything themselves. I want to like his energy and vision and relentless drive for change. But with declarations like this from Mr Musk ….“Civilisational risk is decreased the more we can increase the trust of Twitter as a public platform”….Feckin Nora.

And finally three things

1) AJ Bell Youinvest launched Dodl this week. It’s an app which will suit new or less confident investors. It has a limited range of AJ Bell Ready-Made funds and some big old cheap tracker funds. With a handful of available big name shares. It is cheap and no frills, headed up by a fluffy red monster character. (For any older readers imagine Pootle from the Flumps who has grown up and fallen into a tin of red paint.) Costs 0.15% for the platform and with options like the HSBC FTSE All World Index fund in here (0.13%), or an AJ Bell ready-made collection (around 0.3%), this offers a more than decent option for non-fussy investors at less than 0.5% a year. You can see some cost comparisons here.

2) More confident investors who are interested in how to invest amidst such global chaos – we are running a webinar at 6pm on 5th May with BlackRock’s manager of the £1 billion small cap trust, Roland Arnold, discussing the potential of this sometimes-overlooked asset class. Join us either live or on catch-up.

3) And finally we are making a last call for women who want finance to be better to join our list of Founder Members and shape/critique/influence something secret squirrel which we are building. If you can spare an opinion and want to get in on the action – please join us?

Have a lovely weekend everyone.

Holly