The billionaire went into debt to acquire Twitter but regrets this decision that placed him in an unenviable financial situation.
Elon Musk rarely expresses regret.
When he made the offer to buy Twitter for $44 billion on April 25, many experts believed the Tesla CEO was overpaying for a money-losing platform that lags far behind other social media platforms in terms of advertising revenue and active users.
As a result, many were calling for him to renegotiate the $54.20 per Twitter share price he had offered. The calls grew louder as the financial markets began to fall.
Musk tried a few tricks, but Twitter 1.0 management was unfazed. After an intense six-month battle marked by back and forth, he finally resigned himself to taking control of the platform at the asking price.
The main problem with this high price is that Musk had to go into debt to finance the deal. The problem he has now is that he went into debt to the tune of $13 billion to finance the acquisition of the platform. This was a margin loan, where he put up some of his Tesla stock as collateral.
The way a margin loan works is that once the value of the collateral decreases against the amount borrowed, the borrower must provide additional collateral to make up the difference.
Since the purchase of Twitter took six months to complete, it is not easy to pinpoint when the loan was finalized between May, in the early days of Twitter’s acquisition negotiations, and October, when the acquisition was completed. During this period, Tesla shares traded above $200, peaking at $317.54 on May 4.
‘Be careful when using margin loans’
What is certain is that, with the stock price closing last year at $123.18, the warrant shares had lost between 38% and 61% of their value, possibly forcing Musk to post additional warrants. to offset the decrease in value.
If we take the recent close in Tesla stock, the collateral has lost its value as well. Shares of the Model Y SUV/crossover maker closed February 2 at $188.27, meaning the value of the collateral stock fell between 6% and 41%.
As a result, Musk has to provide additional collateral to make up the difference. The billionaire seems to deduce that the margin loan was ultimately not a good deal. Thus, he has once again advised any investor not to take out a margin loan in a period of crisis of confidence in the markets, as is currently the case, for the purchase of shares.
“In turbulent economic times, be wary of using margin loans to buy stocks,” the billionaire warned on February 2.
This isn’t the first time Musk has warned against margin lending. He had already done it in early December.
The tweets suggest that even companies with strong fundamentals like Tesla (TSLA) – Get a free reportthey are not immune in times of economic uncertainty. Investors tend to give in to fear and panic, resulting in a stock sell-off, no matter how strong the company.
Musk therefore seems to advise against taking a margin loan during those periods. By doing so, he seems to be expressing his regret for doing it himself. For him, many people who have taken out margin loans to buy stocks are in for some very bad surprises.
The billionaire’s warning was shared by many users on Twitter.
“Or at any time. The margin is dangerous as the unexpected can happen,” one Twitter user commented.
“It’s better to never use margin loans,” another user quipped.
“The ubiquity of margin lending has made bubbles bigger and busts more severe,” another user said.
“There will be a reckoning this year,” another Twitter user commented.
