Elon Musk has acquired a 9.2% stake in Twitter, and the news of Musk getting a set on its board of directors has sent shares of the social media platform up to more than 30% this week (1).
As per the US Securities and Exchange Commission filing, Tesla’s Chief Executive owns 73,486,938 shares in Twitter as of 14th March. Based on Twitter’s closing price last Friday, the stake is worth 2.89 billion USD.
It makes Elon Musk the largest shareholder in the company, with a four times higher holding than Jack Dorsey, Twitter’s founder, who has 2.25% shares.
Elon Musk is an avid Twitter user with over 80 million followers. Although he recently stated that he is “seriously considering” creating a new social networking platform.
Musk asked his Twitter followers late last month if they believed the social media network promoted free speech (2).
“A successful democracy requires free expression. Do you think Twitter follows this rule to the memorandum?”
“Is a new social media platform required?” he questioned.
He uses Twitter to keep his followers up to date on the companies he owns, including SpaceX and Neuralink. He is also known for posting memes, which boosts his fan base.
Musk’s influence over the company’s profitability could lead to an influx of celebrity activist investors seeking to exert similar power over other businesses.
And his new position as the company’s top shareholder could result in a dramatic revamp of Twitter, reigniting deliberations about free speech on the platform.
What are Celebrity Activist Shareholders?
So-called “activist shareholders,” usually hedge fund managers who take (stock) positions in various companies and seek to profit through strikingly impatient and public methods such as badgering corporate executives, giving lively interviews to the news media, and writing open letters, are among the most notorious figures in modern America (3).
Activist shareholders aim to improve their and their clients’ financial standing year after year, like any investor. The difference between a lone wolf investor and an activist investor with billions of dollars and a brand behind them is that the latter has the resources – for marketing.
These “activists” make use of their celebrity status and even seek to increase it to promote their actions and the companies in which they have invested (or, in other words, to increase the reach of the signals they send) and persuade others to invest as well, raising prices and thus their profits once they decide to sell off their position.
Each activist hopes to generate positive information cascades for the companies in which they have invested; he hopes that their signals (which can include making boisterous claims through, increasingly, Twitter) will influence the investing masses to buy stock, thereby increasing the value of the activist’s investment through basic market physics (Suggested Reading: Elon Musk’s Influence on the Cryptocurrency Space).
Suppose such an information cascade catches on in a world like stocks, where there is a degree of arbitrariness at every level, and private signals can be outshined by large forces like outside opinions and hype. It may very well last long enough for activists to get in and out, making billions on even short-term investments.
However, the method that activist shareholders employ to improve their image and influence, everything to expand the reach of the signal they broadcast, is not short-term (6).
For example, activist investor Carl Icahn had a conflict with fellow hedge fund manager Bill Ackman over the nutritional supplement company Herbalife.
Ackman aimed to short Herbalife stock, meaning he would profit if the stock fell. He went on a media campaign claiming to have inside information indicating Herbalife as a giant pyramid scheme. Icahn disagreed and instead purchased a long position in Herbalife, which meant he would profit if the price rose.
Icahn engaged in a public feud with Ackman, pushing Herbalife and doubting Ackman’s motivations and financial understanding. The feud reached a climax in 2013 when Icahn and Ackman conducted a live-televised conference call in which they both attacked one other personally (7).
Apart from the amusing skirmish, the most fun element of the show was CNBC’s livestock widget in the backdrop and the sound of people on the stock exchange floor chuckling. Herbalife and Icahn Enterprises stock surged every time Icahn talked. In contrast, Ackman’s Pershing Square Capital Management stock plummeted as he talked.
Although their struggle was fought in words, who had won the battle of signals was clear.
The Growth of Activist Shareholders
Following the announcement, Twitter’s stock traded for almost 13 billion USD on Monday, more than doubling its previous daily high. On Tuesday, the stock market’s upward trend resumed with a 5% gain. As more corporations strive to generate interest and rapid victories, similar statements from other activist investors could become increasingly regular.
According to research by Yale SOM’s Song MA and his colleagues(8), the advent of shareholder activists can boost team productivity and promote innovation for the targeted companies in the long run.
How did activist shareholders get the ball rolling on innovation? The researchers offer four possible reasons.
First, the targeted companies appeared to refocus on their core competencies. For example, they boosted the proportion of exploratory patents (those that significantly cite new information) in core domains by 4% more than the non-targeted companies.
Targeted companies also disposed of a greater number of peripheral patents. Previously, these corporations sold 0.8 percent of their patents per year; this figure has increased by 0.64 percentage points. They were also more inclined to sell patents unrelated to their areas of expertise.
Staff turnover is another element to consider. After the intervention, the percentage of inventors departing or arriving at selected companies increased by 6% to 9%. New hires submitted more patents than those at non-targeted firms, and existing employees’ productivity increased. The authors claim that inventors who left had better patent citation rates, implying that they had “land(ed) on ‘greener pastures.'”
Finally, the group looked into leadership changes. The likelihood of the CEO being replaced was 12-13 percent greater in the companies studied. On the other hand, new CEOs stayed 1.5 years longer than those at non-targeted companies. Executives also controlled a larger percentage of the company’s stock. Activist investors, according to Ma, are “building incentive programs for them to work hard.”
ESG has been the focus of most recent activist campaigns (9). While scandals over free speech and abuse have impeded Twitter’s growth, it still has room to expand with its 211 million active monetizable users (10).
According to Alexandra Cirone, an assistant professor of government at Cornell University (11), Elon Musk may have learned something from former US President Donald Trump: it is better to invest in a social media app than building one from the ground up. Trump’s attempt to build a Twitter competitor called Truth Social collaborates with Digital World Acquisition Corp., a special-purpose acquisition company.
“Breaking into the social media business is difficult. The recent inability of Trump’s Truth Social to debut successfully may have proved to Musk that investing in established platforms is more rewarding,” Cirone added.
Twitter was not a value stock in February, and it will not magically become one today, but with Elon at the helm of the world’s largest’ financial bullhorn,’ a lot of things for and at Twitter might change for the better.
Elon Musk Taking Over Twitter
Matt Levine perfectly explained it in the opening of his Bloomberg piece about Elon Musk acquiring stakes in Twitter (12):
“Look, everything makes perfect sense. It is obvious, intuitive, and straightforward. If you are the richest individual on the planet and are obnoxious, and you routinely play a computer game, that gives you a lot of satisfaction and a sense of identity. In that case, you might be a bit addicted to it, and you might have some recommendations for game updates.”
“As a result, you might leave comments and email the game’s creators, suggesting, “Hey, you should try my ideas.” You may also be ignored by the company (or respond politely but not move fast enough for your liking). Look, I am the richest person on the planet; how much could this company possibly cost?”
“I should just purchase it and modify the game as I see fit. Why should you not be able to play the game you want, even if your objections are minor? If you have no problems, why not purchase the game you enjoy to ensure it remains exactly what you want? The game is Twitter, and Elon Musk is the world’s richest man.”
In other words, Elon Musk has become an activist without even trying to be one! Take that, Icahn and Ackman!
There could be tons of speculation on why Elon Musk shopped Twitter; we see it as a smart decision for him to acquire the financial bullhorn.
There will also be speculations on whether Elon Musk will pressure Twitter to bring back Trumpf on Twitter. However, it also makes sense for Musk to keep him away from competing for attention on the platform (and blame the board as a ‘non’ activist).
The next obvious step for Elon, “the activist and speculator,” is to gain a stake in an exchange or brokerage to show off his trades in real-time. It could be Robinhood, FTX, or Coinbase. Maybe it is time to purchase shares of these companies. (Information added for information/humor purposes only. Readers’ discretion is advised).
We better keep an eye out for his next poll!
What Will Happen to Twitter?
The first improvement might be an “edit tweet” option, but there are concerns about misuse because there are no time limitations, controls, or transparency about which tweets have been modified (15).
His other long-term ambition could be to eradicate “spam bots” in a decentralized system automatically (16).
While other platforms tighten their restrictions against hazardous content, such as Pinterest’s new proposal to ban toxic ESG content (17), Musk is expected to advocate for users to be able to control their content (Read Also: Social Media Platforms May Put Content Moderation Burden on Users).
As one pushes for the elimination of harmful information and the other demands free expression at any cost, the conflict between ESG campaigners and free speech advocates may soon approach a boiling point (18). And social media users will soon be able to choose which platform they want to support (19).
Will they support Musk’s concept of an open protocol and decentralized Twitter? Or will they forsake it in favor of a platform that better suits their values?
Only time will tell; till then, stay tuned for more updates!