Elon has tweeted that Twitter is struggling to get to cash flow positive.
👉 Background: Twitter is the social media giant where people go to share their thoughts, news, and cat videos. It was acquired by techno-king Elon Musk in a $44 billion USD deal... including a $13 billion USD worth of debt.
👉 What happened: Now, Elon has tweeted that Twitter is struggling to get to cash flow positive. On the one hand, Twitter's ad revenue has plummeted by nearly 50%. On the other, the interest repayments on the Twitter debt is estimated to be about $1.5 billion in annual interest payments.
👉 What else: The cherry on top? Two of Twitter's largest investors have re-valued their shares - by 47% and 66% respectively. And it just goes to show how much the interest repayments on a leveraged buyout can hurt.
💡A leveraged buyout (or LBO) is a strategy where a company borrows a significant amount of money to meet the acquisition cost.
💡Once the acquisition is successful, the acquired company (ie Twitter) is responsible for the repayment of the debt...not the acquiring company). But this is a very risky play.
💡In 2012, Anchorage Capital acquired Dick Smith for $94 million - and this deal was heavily funded by debt. They slowly turned around the company and floated it on the ASX... but it had so much debt that it just couldn't survive.
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