Hey guys, it's sasha, elon musk is going to buy twitter despite the feeble attempts of the board to stop him from doing it. In this video, i will explain exactly why the poison pill that the twitter board have implemented will fail i'll, show you all the numbers and explain the options available to elon musk and why there is absolutely nothing that the twitter board can do to prevent him from Buying the company and firing the lot of them, in fact, i use the term their company very loosely here because it recently transpired the entire board of twitter happens to own next to zero twitter shares. Jack dorsey is in the process of leaving the board and is the only one who actually owns any twitter stock with the entire rest of the twitter board. Owning 0.12 off the twitter shares available between them.

So 10 board members on the twitter board own an average of 0.012. Each you've got to wonder why a board of directors happens to own next to no shares in their own company and why it is that their decisions seem to not care at all about anyone who does happen to own twitter shares. So i am going to explain exactly what the impact on twitter shares is going to be and why this poison pill is going to fail. I don't know if you own twitter shares or maybe you're thinking of buying some to take advantage.

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All you have to do is use my link in the description and here's. The compulsory disclaimer your capital is at risk all right, so after elon musk went and bought up his 9.1 stake in twitter. The twitter board of directors went absolutely bananas. They went completely over the top trying to stop elon musk from buying a company for a much higher price than the current share price.

We're talking about 20 up on the share price, as i'm recording this video remember that the people sitting on that board of directors own pretty much no twitter shares. So you really have to think why they might not care too much about their fiduciary duty of making the best decision for their shareholders in this case and instead deciding to screw them over and oh boy, are they going to screw over? Everyone who owns twitter shares? Let me explain immediately after elon musk offered to buy twitter, the board implemented the poison pill. This is a defensive move by the boards to prevent somebody from buying out the company and the way that twitter have implemented. It is a little bit different.

They have created a new type of share class, called the series, a participating preferred stock. The simple version of how it works is this. Everyone who owns a twitter share has been issued with a special right to acquire this new series, a preferred stock. This right will take effect if elon, musk or anybody else buys more than 15 of the total number of twitter shares.

Remember that the latest disclosure for elon musk had him only 9.1 percent, so everyone who owns twitter shares can go and buy. These new shares that have exactly the same voting and ownership rights. Well, not exactly because this is preferred stock, which places it slightly higher up the food chain if twitter was to go bankrupt and also each old share is worth one one thousandth of these new shares. But the new shares also have 1 000 times more voting power.

So basically, if you ignore the legal mumbo jumbo, they are the same in terms of what they give to the shareholders. So if elon musk goes and buys over 15 percent of twitter, all existing twitter shareholders will be able to go and buy these new shares for half price except elon musk. This is an old strategy that goes back to the 80s that stop someone from being able to acquire a company in a hostile takeover, and it sort of sounds good on the surface, because existing shareholders have the opportunity to go and buy more shares for half the Price, but the truth is if this scenario plays out the existing twitter shareholders are going to get screwed big time, and here is the maths, let's round the numbers up to make it easy and say that twitter shares cost fifty dollars each then let's say that elon Musk goes and buys 15 of twitter, so elon owns 15 and everybody else owns 85 percent. The existing shareholders then get the option to buy these new shares for half the price.

So if you own one twitter share at say 50 you can go, buy. Another twitter share at 25, so you will then own two twitter shares for a grand total price of seventy five dollars, and that means that each share cost you thirty seven dollars. Fifty stay with me. This is going to get very nerdy, but it's really important, because this explains how twitter shareholders are going to get massively screwed by the twitter board of directors.

Okay. So if elon breaks the 15 shareholding level, then there will be less than 85 percent of twitter shares owned by everybody else. So if everybody else went and bought those extra twitter shares, then the total number of shares would become 15 percent elon musk's bit plus two lots of 85 percent so 185 in total of the original number of shares. So if you take the previous valuation of twitter - and you assume no change to that valuation based on the board of directors taking an insanely stupid decision, even if the share price does not drop as a result of that directly, then the dilution here is a hundred Percent divided by 185 percent, so the net result is 54.

So that means that every shareholder takes a 46 haircut, and i know a few other people have recently talked about this and even got this bit wrong, but they all forgot another important calculation step, because those extra shares that everyone is buying at half price actually earn Twitter money that goes into twitter's cash position on the balance sheet immediately and, in theory, has a direct one-to-one effect on the company valuation, because you're buying money in the bank account that you've just put there. If you like, you might argue that a giant chunk of extra cash is worth even more than the one-to-one value, because you know it enables the company to grow faster or reinvest that money. But let's just keep it simple for this explanation. So 85 of the shareholders go and buy shares at a 50 discount, so they have just added half of 85 percent of twitter's old valuation as dollars onto the balance sheet 42.5.

So that means that whatever your old valuation of twitter was in terms of the total company value, the new company value is now 42.5 higher because of those extra billions of dollars of cash that just got pumped into the balance sheet. So now, let's add it up. The share price was 50, then, because of the 85 of shareholders buying additional shares. The share count goes up and dilutes the share price down by 46.

So now your share price becomes 27, but then you go and add that 42.5 percent of extra value in the company that you just created by giving them extra cash and now the par value for the shares becomes 38.48 and remember that each shareholder now owns two Shares of twitter in this case, except for elon musk one for fifty dollars, one for twenty five dollars, so the average cost basis here is 37.50. So in this scenario, where every shareholder goes and buys these additional shares technically, every shareholder makes a very tiny gain up from 37.50 to 38.48, and this game is because one shareholder, elon, musk, didn't get to buy shares for half price, so everyone technically gains money at His expense - this is the calculation that i saw some other people on youtube get wrong because they failed to account for the extra cash on twitter's balance sheet and they said that all shareholders would lose a lot of money as a result. However, the fact is not all of the 85 of other shareholders will be able to buy additional shares. Many of them will probably not want to carry the extra risk of the share price going down by more than just the share dilution because of the impact of the board taking a moronic stupid decision, but also because you will have to come up with a large Amount of cash to go and buy those extra shares.

However, many shares you happen to already have: maybe you acquire them over a long period of time. You will have a very narrow window of opportunity in which you have to come up with half of the same amount of money in cash to buy the extra shares, and many people simply won't have the cash or the finances available or wants to go and dump That much extra money into twitter shareholding just because there is an opportunity to go and buy those extra shares also remember that twitter has a very high level of institutional ownership according to nasdaq it's 75 percent. This number has actually dropped slightly in the last few days, which is interesting in itself. But what is even more interesting is the fact that a lot of these institutional investors are actually passive.

Look at the biggest ones in the list, vanguard, blackrock, state street. It all sounds like big investing companies with mysterious rich people behind the scenes, but in truth, a giant chunk of all of this money is just from passive index funds. I just went and took a look at 31 out of the hundreds of these different passive funds out there and looked at how many twitter shares each one of them owns. And so you can see here that vu vti spy and a bunch of other popular funds.

In there, just these ones alone own over a hundred million of twitter's shares, and there were 799 million shares of twitter as of the end of q4 last year, with another 66 million and rsus and options so just to those passive funds that are looked at by Themselves, owned 13 of the entire twitter and the total for all passive funds is going to be a lot more. Those funds are fully invested and they don't carry around spare cash. Some of them carry pretty hefty amounts of twitter shares and redistribute ownership based on fixed prescribed rules, and you would say that well, of course, they're going to buy these additional shares because if they do not, their ownership of twitter shares will drop because of dilution. But they also have to be careful to make sure they don't over buy because they also know that not all shareholders will exercise the option to buy because just think about it.

If elon musk did go on by 15 and the twitter board did enact this poison pill, you would probably argue that your valuation of twitter would dip, because you would place a higher risk, a significantly higher risk on very irrational behavior by the board, destroying shareholder value. At all costs, because the board would rather screw over shareholders to protect whatever secrets it is that they don't want to come out. So, on the basis that we know not, all of the 85 of the remaining shareholders will buy shares. You have to hedge your risks and not buy all of the available shares.

If you are a passive fund, because then you will be over indexed and have to immediately sell the shares and maybe they'll be able to do. Maybe some of them will do that in order to take the effective profit if they determine that there is a profit to be had, but here's the big problem, let's say, for example, that 50 of all the twitter shareholders out there other than elon musk. Take the option and go and buy twitter shares and they find the cash to do it 50 by the way is a lot 50 of 85 percent is 42.5 percent and 42.5 of twitter's valuation. Right now is about 15 billion dollars.

So 50 of those who can buy the new shares do buy them. We now have elon staying with us 15 of the original shares, but 42.5 of the other shareholders will also stay with their shares, because they're not going to exercise shares and the remaining 42.5 will double their shares to 85 in total. So we now have 15 plus 42.5 plus 85 equals 142.5 of the original number of shares in circulation. So 100 divided by 142.5 percent, equals 70, so the shareholders just got diluted by 30, but 42.5 of the total shareholders now have gone and paid half price on those new shares, so twitter just earned half of 42.5, which is 21.25 in cash, so the total company Valuation is now 121.25 of what it was before the dilution.

So now those who did exercise their rate and bought those extra shares have two shares with a cost basis of 37.50, and those shares are now worth 42.45 assuming the share price doesn't dip. So if you went and spent an extra 50 in cash on your shareholding, you have made roughly a 13 gain on the value of your shares. But if you did not, because you didn't have the cash or you didn't want to spend the cash on twitter shares or your risk valuation of twitter changed, then your 50 share that just lost 15 percent in value, because the twitter board is a bunch of idiots Trying to protect their 300 000 annual salary for giving shareholders no value whatsoever over the last 10 years. But then imagine the reputational impact on twitter share price, because if this happens, if you go and buy twitter shares you're putting yourself at risk of having to spend more cash to pump into the company's balance sheet.

If elon musk goes to 15 again. And if you don't spend the 50 more cash, then you will lose 15 or more of your investment. If more of the funds choose to buy those rights, then you will lose a lot more than 15 because it's going to be more share. Dilution but then remember that if 50 of all eligible shareholders went and bought, those extra shares, elon musk's share of twitter would drop from fifteen percent to ten point five percent, so he would need to go and buy another four point: five percent: to get him back To fifteen percent total so four point: five percent of twitter is somewhere around the 1.6 billion, maybe a bit higher, depending on how the valuation fluctuates, which is a reasonable amount of money.

But it's somewhat trivial for a guy who has well over 200 billion dollars in assets against which he can relatively easily raise collateral or find funding partners. So imagine that elon then goes and spends another 1.6 billion dollars to get himself back up to 15 percent. The twitter board, then has to go and enact another poison pill, and the other shareholders have to spend another 50 percent in cash on top of the 50 percent they've already put in so after just two rounds of this, you have to go and spend 125 percent Of your original shareholding in cash with short times to raise their cash just to avoid getting diluted and then elon just goes and does the exact same thing again if he chooses to with maybe more like two billion dollars and then twitter shareholders have to start partying With over a hundred percent of their original shareholding in cash just to keep their position alive, so you can quickly see the problem here. After just two rounds of this game, elon musk has spent another three and a half - maybe four billion dollars - to play the game about eight percent.

Maybe ten percent of what he has already offered to buy the whole company, but the entire rest of the shareholders would at that point have to spend 200 percent of their original shareholding just to stop the value of their shares. Dropping so the odds are stacked firmly against the rest of the shareholders, because the numbers quickly go completely bonkers. Now. Elon musk probably doesn't want to do this because it's not exactly going to make him friends with twitter shareholders.

They won't like him very much for diluting them out and forcing the poison pill onto them, because he will be indirectly making them lose money, but he also knows that the twitter board won't survive to that point because they will be out of the door long before The shareholders have to part with more than a hundred percent of their original shareholding, just to stay afloat with their investment. So he knows that, although it sounds all funky and everyone got very excited about this poison pill. Unfortunately, that twitter poison pill is dead on arrival and the board can't use it effectively without an immediate shareholder revolt and probably significant prison time on top. So here's what elon will most probably do.

Instead, he's going to go and make a direct tender to the twitter shareholders, given the situation that we're in right now, that seems like the most plausible approach. This is a move that is not very common, but within the rules of the game, elon will go to existing shareholders. Behind the board's back - and you say here i am - i will buy your twitter shares off you for a 20 or 30 or whatever premium on your current share price. If you want to go and sell them to me, if you do not, you're gon na have to go and get diluted by your own board, because there are a bunch of spineless pricks.

So you can either collect a 20 return immediately from me or lose a big chunk of your value. You can get to make the choice and the speculation out there is that either one is going to do exactly this in the next week or so. He is even hinted at doing it on twitter by making repeated plays on the word tender. So, unfortunately, for the twitter board, they are massively screwed, and this is all their own.

Making all they are doing is massively ruining their reputations in the process of trying to cover up whatever it is that they don't want elon musk to find out about their editorial practices or ethics policies, or whatever else is being hidden and eventually they're going to lose. This battle, however, hard they're trying not to in the meantime. I am here with my popcorn, enjoying watching this from the sidelines and if you found this video useful, please don't forget to smash the like button for the youtube algorithm. Remember that if you're based in the uk, you can go and get your ten dollar bonus for trying out lightyear to sponsor this video through the link in the description, and thank you so much for watching.

I really really appreciate it and, as always i'll see you guys later, you.