Tuesday, April 26, 2022

Why does Twitter stock exchange fall after Musk's acquisition?

Twitter will exit the stock exchange after Elon Musk bought it, and this process, often used by vulnerable companies, will provide a greater margin of manoeuvre by keeping it free from market constraints, but the success of the move is not guaranteed.

Widespread tactic

A company that enters the stock exchange often makes headlines to raise funds or allow its founders, investors and employees to sell their shares, but companies also regularly withdraw from the stock exchange in order to correct their position with the possibility of re-listing their shares on the market.

Michael Dell took the company by its name off the stock exchange in 2013, as demand for desktop computers declined, saying it would be "more flexible and entrepreneurial."

Dell returned to Wall Street five years later after correcting its situation.

In an experience that did not meet the same success, U.S. businessman Warren Buffett agreed in 2013 with Brazilian company 3G to withdraw ketchup manufacturer Heinz from the stock exchange and then merged with Kraft Group. However, the new company's share price on the stock exchange is 40% lower than when it was launched.

How Much of Twitter does Elon Musk own

Capital investment companies regularly buy listed companies in the hope of making profits through radical measures such as large-scale disbursements or by merging them with another company they own.

But as far as Twitter is concerned, Elon Musk's intentions remain vague, as the world's richest have repeatedly spoken of his intention to defend freedom of expression by modifying some jobs on this social network, but he has not yet put forward any specific economic strategy.

Less pressure?

By withdrawing from the stock exchange, the company escapes multiple pressures from shareholders and public opinion, "who, according to the prevailing idea, impose a lot of restrictions on management and prevent it from using its capital effectively," says William Lee, chief economist at the Milken Institute.

However, after the withdrawal of a company from the stock exchange, new owners generally become "tighter in terms of investment returns".

The difference, he argues, is that a listed company must take into account shareholders who are concerned with issues of diversity, the environment and wage ladder, among other things. The investment company focuses particularly on the practical and financial aspect.

In particular, Twitter should repay loans granted to Elon Musk to finance the process, says Gregory Volochen, portfolio manager at Meeschaert Financial Services.

He added that the group would probably not be able, at least in the short term, to give up ads as Musk suggested.

More time and freedom

Volochen asserts that with Wall Street's watchful eye often requiring immediate results, companies "often have difficulties moving forward," because they don't necessarily have the margin to test new products.

What is elon musk going to do with twitter

The unlisted company does not have to publish its quarterly results and submit to the terms of the United States Financial Markets Regulatory Authority SEC.

Elon Musk is not seeking short-term profitability, as has been demonstrated with Tesla, SpaceX or other initiatives.

Nor does he shackle himself to the usual rules, william lee points out. In the face of calls to manage what's in place and to take into account the environment, Elon Musk says, Probably in his own decision: it all! I will withdraw the company from the stock exchange and run it in the way I consider it optimal," the expert said.