It goes without saying that the overarching goal of an activist such as Elliott Management is to get a positive return on its investment. Everything else, such as pushing for capital returns, a strategic review or the removal of a CEO that it's not fond of, is just a means to an end.
This is worth remembering as Elliott, which owns about 4% of Twitter (TWTR) and was recently reported to be pushing for Jack Dorsey's ouster, teams with PE firm Silver Lake on a deal with Twitter that (for now at least) doesn't involve Dorsey's removal. Whether or not Dorsey is eventually removed, the deal does leave Elliott well-positioned to make money on its Twitter bet.
In a nutshell, the deal:
- Adds three directors to Twitter's board, raising its size to 11 people. Silver Lake's Egon Durbin and Elliott's Jesse Cohn will be added, as will an independent director meant to "reflect the diversity of the Twitter service and who also possess deep technology and AI expertise."
- Features a standstill agreement between Twitter and Elliott that lasts until a month before board nominations are due ahead of Twitter's 2021 annual meeting.
- Calls for Silver Lake to invest $1 billion in Twitter via 0.375% convertible debt that's due in 2025 and has a $41.50 initial conversion price (21% above where Twitter trades as of Tuesday's close).
- Calls for Twitter, which had $6.6 billion in cash at the end of 2019 and is getting a $1 billion infusion from Silver Lake, to buy back $2 billion of its stock.
- Is accompanied by a commitment from Twitter to aim for a 20%-plus 2020 increase in its monetizable daily active users (mDAUs - daily users who can see ads), and to accelerate revenue growth and gain digital advertising share beyond 2020.
That last part is key. While Twitter's mDAUs grew by 21% in 2019 to 152 million, the company will be facing tougher annual comps this year than it did last year. That's a big reason why the FactSet consensus estimate is for mDAUs to only grow 11% this year (to 168 million).
Accelerating revenue growth shouldn't be as hard in 2020, since (following a late-2019 growth slowdown caused in part by ad execution issues) revenue grew only 14% last year to $3.46 billion. But accelerating it in subsequent years won't be as easy, at least unless mDAU growth remains high. For now, the consensus is for 15% revenue growth in 2020, followed by 14% growth in 2021 and 12% growth in 2022.
Basically, to win Silver Lake's backing and convince Elliott to agree to a cease-fire, Twitter had to commit to challenging goals whose attainment would (barring another big market downturn) most likely lead its stock trade above where it's currently at, and perhaps also above the initial conversion price for Silver Lake's debt.
And in the event that Twitter doesn't reach these goals, Elliott, which might have faced an uphill fight if it tried to oust Dorsey at Twitter's 2020 annual meeting, can use Twitter's failure to hit those goals to renew its push for a new CEO next year. The firm reportedly feels (with good reason, I think) that Twitter's product innovation hasn't been as strong as it should be, and that the fact that Dorsey serves as both Twitter and Square's (SQ) CEO has been a negative.
Either way, Elliott probably wins. Either it turns a profit on its Twitter bet thanks to the company's achieving of difficult user and revenue growth goals, or it has a decent shot next year of achieving a result (i.e., Dorsey's ouster) that it considers key to unlocking shareholder value.
And in both scenarios, Twitter still carries out an EPS-boosting stock buyback that it has no trouble affording.