The world has berated Elon Musk for his ruthless and apparent ignorance – firing much of the Twitter staff even from critical positions or creating a work environment where they quit.

Why would anyone do this?

 In my last 30 years in business, I have known or interviewed several successful business turn-around consultants brought in to improve or rescue failing businesses. Three were Sanford Sigoloff, Andy Galef, and Tom Holce.  Turn-around consultants are professionals who specialize in helping struggling companies improve their financial performance and return to profitability, notorious for aggressive cost-cutting and the reputation for firing large numbers of employees

Sanford C. Sigoloff was a turnaround consultant at Wicks Home Furnishings in the mid-1980s. He was so brutal he was sometimes called “Ming the Merciless” – the evil master enemy of Flash Gordon. He incorporated radical methods of selling off inventory, closing stores, selling real estate, and firing workers and management. Why did he do this? To get an efficient company, renegotiate debts with creditors on more favorable terms, and begin generating positive cash flow and profitability again. Wickes emerged from bankruptcy a few years later.

Tom Holce of Oregon was canonized when the Oregon Entrepreneurship Awards were named after him. While a gifted and brilliant engineer founding several companies, I asked him his secret to success when taking over a new company. He said it was his Parking Lot Party. “What’s up Parking Lot Party?” I asked. “I call everyone into the parking lot and tell them they are fired,” he answered. “All company positions will be open for hiring tomorrow, and we will interview you and your past performance for your job.”.My obvious question was ”Why would you do that?” He answered, “because there’s always underperforming people and excess positions that do not provide core value in every company – it develops over time.” When management changes and the management style changes, many people do not fit in – and are fired or quit.

Andy Galef of Galef & Grisanti Consultants had similar turnaround skills and used them to become an Leveraged Buy Out (LBO) investment bank, purchasing companies and creating new value. It was a successful strategy.

So how was Twitter doing before Musk?

Twitter’s revenues have continued to climb and turned its first profit in 2017. 

Source:https://www.statista.com/statistics/274568/quarterly-revenue-of-twitter/?locale=en

But profits have not been consistent and are now negative or dropping. 

Source:https://www.statista.com/graphic/1/299119/twitter-net-income-quarterly.jpg

It is important to note that this purchase was an LBO, so Musk acquired Twitter with some equity and a significant amount of debt. A recent article leads, “Elon Musk says his $44 billion Twitter takeover might result in a bankruptcy filing. But there could be other options.” Here is a link to the full article that nicely sums up Twitter’s failing performance –  How Elon Musk’s Twitter Faces Mountain of Debt, Falling Revenue and Surging Costs by Mark Maurer Nov. 21, 2022, 9:48 am ET https://www.wsj.com/articles/how-elon-musks-twitter-faces-mountain-of-debt-falling-revenue-and-surging-costs-11669042132

Twitter’s Potential Bankruptcy

So is Elon Musk a turnaround person like Sigoloff, Galef, or Holce? His past as a start-up genius doesn’t suggest that. As noted, turnaround consultants can appear ruthless and a new company culture alienating existing employees, shareholders, customers (e.g., ad companies), and users (the public).

But do some of the LBO and bankruptcy rules apply here?

Absolutely. 

And what happens if Musk drives Twitter to bankruptcy as a result of his changes?

First, when a company goes bankrupt it often gets to renegotiate its mountain of debt. That usually means better debt terms such as lower interest rates payable over a longer period of time. These improve the company’s future prospects and a chance to generate positive cash flow and profits. 

Secondly, in general, shareholders of a bankrupt company are likely to experience dilution (see sources below). This means that existing investors’ Ownership Shares of a company decline as new money and new investors come into the company to “rescue” it. The company may issue new shares or securities to creditors and/or investors as part of a bankruptcy reorganization process. 

This means Musk’s Saudi equity sources who helped Musk acquire Twitter may end up owning less of Twitter than they anticipated…and if Musk invests more, he can own more.

Here are some sources that further discuss the issue of shareholder dilution in bankruptcy:

• Investopedia: “How Bankruptcy Affects Shareholders” Link: https://www.investopedia.com/ask/answers/102714/how-bankruptcy-affects-shareholders.asp . This article explains how shareholders of a bankrupt company may be impacted by the bankruptcy process, including potential dilution.
• The Motley Fool: “What Happens to Stock When a Company Goes Bankrupt?” Link: https://www.fool.com/knowledge-center/what-happens-to-stock-when-a-company-goes-bankrupt.aspx . This article provides a detailed explanation of how bankruptcy can affect shareholders, including the possibility of dilution.
• The Wall Street Journal: “Shareholders Are Often Left With Nothing When Companies File for Bankruptcy” Link: https://www.wsj.com/articles/shareholders-are-often-left-with-nothing-when-companies-file-for-bankruptcy-11595609406 This article discusses the broader issue of shareholder losses in bankruptcy, including the potential for dilution as part of the bankruptcy process.

So, “Is Elon Musk good for Twitter and Smart like a Fox?”

Like the answer to the old Chinese parable about the lost horse coming home with a beautiful wild stallion,

Well…MAYBE!

Other Sources

·         Wickes Reaches an Agreement With Creditors https://www.nytimes.com/1984/02/24/business/wickes-reaches-an-agreement-with-creditors.html  

·         Wickes’ Wonder: Largest Chapter 11 Bankruptcy Emerges a Textbook Turnaround by Warren Brown, September 23, 1984 https://www.washingtonpost.com/archive/business/1984/09/23/wickes-wonder-largest-chapter-11-bankruptcy-emerges-a-textbook-turnaround/0bd09740-88c5-4525-8b9c-7e4f3d7c8573/  

·         Andy Galef – GGG Partners, LLC (Previously Grisanti, Galef & Goldress), Business Consulting Services, Restructuring & Turnaround Advisory for Over 60 Years https://gggpartners.com/ and LinkedIn at https://www.linkedin.com/company/grisanti-galef-&-goldress?original_referer=https%3A%2F%2Fduckduckgo.com%2F

·         Remembering Tom Holce, a remarkable entrepreneur by Norm Duffett , Sep 26, 2010 updated Sep 23, 2010, 1:15pm PDT https://www.bizjournals.com/portland/stories/2010/09/27/editorial2.html