Before the markets opened on Thursday, Elon Musk announced he had made an offer to buy Twitter for…
$43 billion
When the markets closed on Thursday Elon Musk's net worth sat at…
$250 billion
That quarter-trillion-dollar fortune easily makes Elon the richest person in the world. At this moment, he's about $75 billion richer than the world's second-richest person, Jeff Bezos. He tops the #3 person, Bernard Arnault, by $110 billion and the #4 person, Bill Gates, by $120 billion.
It would be easy to assume that the richest person in the world, a person with a net worth of $250 billion, could EASILY afford to buy Twitter for $43 billion. On paper you would assume that Elon could buy Twitter for $43 billion and still have more than $200 billion left over. Right? Turns out, maybe not…
(Photo by SUZANNE CORDEIRO/AFP via Getty Images)
Elon is "Cash Poor"
Elon takes no salary as CEO of Tesla. His net worth is almost entirely made up stock in Tesla and SpaceX.
Since Tesla went public in 2010, he has largely lived off lines of credits from various banks that were backed by Tesla shares as collateral. In fact, just before Tesla went public, when Elon was in the midst of a bitter divorce fight, he told a California judge that he had zero cash and was "living off emergency loans from friends."
He elaborated:
"I have no other investments that I could easily sell in order to generate money. My cash position is very limited. About four months ago, I ran out of cash entirely."
When Tesla did eventually go public in 2010, its market cap was $2.2 billion. Fast forward to 2019, when Tesla's market cap was $50 billion, you might assume his cash position had improved. Nope.
In 2019 Elon was in the midst of another court battle, this one a defamation case brought by a rescue diver who Elon called "pedo guy" over Twitter. In this court case, once again Elon claimed to be "cash poor" and "financially illiquid."
Fast forward to the present. Tesla's market cap is $1 trillion and, amazingly, Elon's liquid financial position is largely unchanged.
When you hear that Elon has a net worth of $250 billion, here's how that's calculated:
– He owns 17% of Tesla right now, free and clear. That's around $170 billion.
– He also has the option to buy an additional 59 million Tesla shares. If he exercised those options today, he would be left with around $37 billion worth of actual stock after paying various strike prices.
– He owns 43% of privately-held SpaceX. At SpaceX's last funding the company raised money at a $100 billion valuation. That's $43 billion in pre-tax, paper wealth belonging to Elon.
$170 + 37 + 43 = $250 billion
The most important takeaway in the above equation is that NONE of that wealth is liquid and it's all before Elon paid the IRS their share if any of it was liquidated.
Would Elon REALLY sell approximately $85 billion worth of stock to be able to have $43 billion after taxes to fund his Twitter purchase? Almost certainly not.
Instead of selling shares he could go to a big bank and borrow $43 billion using Tesla stock as collateral. BUT! This would be an extremely risky move on the bank's part. Tesla stock goes up just as quickly and unpredictably as it goes down. Please recall from earlier in the article how we pointed out that just three years ago, 2019, Tesla's market cap was $50 billion. This isn't a steady giant like Procter & Gamble or Coca Cola that existed 100 years ago and will probably exist in 100 years. Tesla's share price swings wildly on rumors, theories and, most importantly, Elon's Tweets. There's just as much of a chance that Tesla increases by 10X in the next few years as there is a chance it ceases to exist.
For example, after taking a $43 billion bank loan would it be such a stretch of the imagination to picture a world where Elon woke up one day and Tweeted something like "Electric cars are stupid. I'm selling all my Tesla shares and investing in frogs."? No, right?
So it seems unlikely that the bank loan route would be a viable option.
I do have to correct something that just occurred to me. Elon already owns 9.2% of Twitter. He bought his current stake in mid-March, paying around $2.3 billion. In order pay $43 billion for Twitter he would actually only need to come up with $38.7 billion of his offer price. So that would require around $70 billion pre-tax.
