Elon Musk has decided to acquire a substantial number of Twitter Inc. (TWTR, Financial) shares, amounting to approximately 9.2% ownership of the American social media giant. The purchase comes only a short while after he publically implied that the company is a threat to democracy with its censorship being biased.
Like most, I believe Musk is making an active move on the company; why else would he be a contrarian and spend a significant amount of his money on buying shares in it two weeks later?
I feel it is necessary to cover a few basics on activist investing and speak about how it could influence the stock. It's evident that investors have once again reacted to a Musk event rather than seeking value, and it's likely that many will get burnt if they don't understand the dynamics of this move correctly.
Musk's investment remains a financial asset
Under U.S. GAAP accounting laws, an investment in a publicly traded company that holds less than 20% ownership is considered a financial asset rather than minority or majority ownership. The owner of a financial asset has voting abilities, but doesn't yield significant influence over daily operations. Furthermore, Musk's Twitter shares will likely be classified as "available-for-sale" securities, meaning it's unclear whether he'll look for a short-term price discrepancy or hold the securities until maturity.
It's only when Musk reaches the 20% ownership level that he'll be eligible for board representation under the investment in associates classification. He would then have the ability to make significant related party transactions, yield control over daily operations and essentially be Twitter's new boss.
The likelihood is Musk will probably end up buying more shares of Twitter to yield more influence, but it's not set it stone just yet and, even if it was, then what? Would you necessarily be invested in a better stock?
An alternative here would be Musk gaining significant control over the company as an invited board member rather than buying his way in. But why would he first need to invest a substantial amount if the board wanted him around organically?
Final word
Twitter's stock has risen substantially on the news that Musk has invested in the stock. However, matters need to be looked at out of isolation and investors need to understand that just because he is the company's largest shareholder doesn't mean he's the orchestrator of daily operations.
