News of the purchase sent shares of Twitter (TWTR) soaring 22% in early trade. Musk didn’t disclose what he was paying for the shares, but his stake was worth $2.9 billion at the close on Friday and $3.5 billion following the rise early Monday. Musk’s filing did not disclose the purpose of the purchase or any plans for the company. But he’s been a high-profile critic of Twitter politics in the past. Last month he said he was “seriously thinking” about creating a new social media platform. “Given that Twitter serves as a de facto public marketplace, failure to uphold the principles of free speech fundamentally undermines democracy,” Musk said tweeted Last month. “What is to be done?”
Any time an investor buys 5% or more of a company’s stock, they must disclose the purchase in filings with the Securities and Exchange Commission. Although ownership of less than 10% in a company is considered “passive” in the eyes of Wall Street, it could be a sign that Musk is looking to take a more active role in running Twitter. It’s one of the factors causing other investors to buy shares and boost the price early Monday.
“I think he intends to take action and force changes on Twitter,” said Dan Ives, tech analyst at Wedbush Securities. “This is a shot across the bow by the board and management team of Twitter to start discussions.”
While Musk isn’t trying to change the way Twitter works, his big purchase could prompt some other activist investors to buy into the company, Ives said.
“One way or another, he’s going to change the course of Twitter,” Ives said.
Ives said it’s probably not realistic for Musk or anyone else to try to build a new, competing platform from scratch. So it makes more sense for him to try to change practices at Twitter itself.
Twitter didn’t have an immediate response to a request for comment on Musk’s investment.
Musk among the most popular tweeters
Musk has 80 million Twitter followers, far more than any other CEO. And he’s a frequent tweeter, using it as his primary form of spreading news about Tesla (TSLA) and SpaceX, the two companies he runs, neither of which have another company’s traditional PR department.
However, his tweets have gotten him into trouble at times.
In 2018, Musk tweeted that he would take Tesla privately at $420 per share and that he had “secured the funding” to do so. It later became clear that while he was in talks about funding such an offer, funding was by no means secured. Musk settled the case by stepping down from his role as Tesla’s chief executive officer, though he remains its CEO. He and Tesla also each paid a $20 million fine, with Musk compensating the company for its payment by purchasing an additional $20 million in Tesla stock.
He also agreed that any of his future tweets, which may contain material information about the company, will be reviewed by other Tesla executives before they are sent. The SEC has questioned whether or not he complies with that provision of the agreement, and Musk and the agency are fighting it in court.
The recent turmoil on Twitter
Twitter founder Jack Dorsey abruptly resigned as CEO last November without the kind of notice normally given with this type of leadership change. He was succeeded by Parag Agrawal, who had been Chief Technology Officer. Musk had spoken out Support for Dorsey in the past when he was criticized by some shareholders. And when Agrawal was first named Twitter CEO, someone else tweeted the fact that Google, Microsoft, Adobe, IBM, Palo Alto Networks and Twitter are all run by executives who grew up in India, Musk responded with his own tweet: “USA benefit greatly from Indian talent!” But only days later, he tweeted a meme this equated Agrawal with former Soviet leader Joseph Stalin and portrayed Dorsey as a former Stalin confident that the dictator had later been assassinated.
“Musk has already indicated that he disagrees with Agrawal’s appointment and would like some changes,” Morningstar analyst Ali Mogharabi said in a note to clients. “This creates a bit more uncertainty as to how Agrawal and the company might react to what is now the company’s largest shareholder.”
Unlike Musk, who owns more than 20% of Tesla, Dorsey’s stake in Twitter is relatively modest at just 2.3% of the company’s stock.
Musk doesn’t necessarily need to become Twitter CEO to persuade the company to change its practices, Ives said. And it’s not entirely clear what changes he’d like to see.
He recently conducted a Twitter poll asking his followers if they think Twitter adheres strictly to the principle of free speech – 70% said no – and another poll asking whether his Algorithms should be open source – 83% answered yes. Both surveys received more than 1 million responses.
But the kind of changes Musk might advocate for on Twitter could be very different from those sought by a traditional activist investor, which typically involve boosting a company’s share price.
Activists have targeted Twitter in the past
Twitter has faced activist investors before. Hedge fund Elliott Management has been pushing for changes to the platform in 2020, including potentially ousting Dorsey or requiring him to give up a separate CEO position he held at payments technology company Square (SQ). Dorsey survived this challenge, but eventually decided to leave Twitter more than a year later. Twitter has become a target for critics on both sides of the political divide. Some believe the platform hasn’t done enough to combat misinformation about Covid-19 and alleged voter fraud. Others say it’s wrong to censor some positions, including banning former President Donald Trump. Twitter’s $31.5 billion market value is a fraction of what companies like Tesla or rival social media giant Meta, which owns Facebook and Instagram, are worth. And Twitter’s stock has lost more than half its value since February 2021, when the company reported that its efforts to combat misleading content surrounding the US election have cost the platform some users. Even so, it would likely be too expensive for Musk to own Twitter on his own, Ives said, especially since most of his wealth is tied up in his holdings in Tesla and SpaceX shares. According to Forbes, Musk is the richest person in the world with an estimated net worth of $288 billion.
“He would have to partner with private equity,” Ives said. “It’s not like he can do it himself.”