The billionaire went into debt to acquire Twitter but he regrets this decision which put him in a not very enviable financial situation.
Elon Musk rarely expresses regret.
When he made the offer to buy Twitter for $44 billion on April 25, many pundits 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 asking him to renegotiate the price of $54.20 per Twitter share he had offered. The calls became more louder when the financial markets began to fall.
Musk tried a few tricks but the management of Twitter 1.0 did not flinch. After an intense six-month battle marked by twists and turns, he finally resigned himself to taking control of the platform at the initial price.
The main problem raised by 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 shares as collateral.
The way a margin loan works is that, once the value of the collateral decreases vs. the borrowed amount, the borrower must provide additional collateral to make up for the difference.
As it took six months to complete the purchase of Twitter, it is not easy to pinpoint when the loan was finalized between May, in the early days of the Twitter acquisition negotiations, and October, when the acquisition was completed. During this period, the Tesla shares traded above $200, reaching as high as $317.54 on May 4.
‘Be Wary of Using Margin Loans’
What is certain is that, with the share price closing last year at $123.18, the collateral shares had lost between 38% and 61% of their value, possibly requiring Musk to post additional collateral to make up for the value decrease.
If we take the recent closing of the Tesla stock, the collateral has also lost its value. Shares of the maker of the Model Y SUV/crossover closed Feb. 2 at $188.27, meaning the value of the collateral shares 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. He has thus 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 buying shares.
“In turbulent economic times, be wary of using margin loans to buy stock,” the billionaire warned on Feb. 2.
This isn’t the first time Musk has warned against margin loans. He had already done so at the beginning of December.
The tweets suggest that even companies with strong fundamentals like Tesla (TSLA) – Get Free Report aren’t immune in times of economic uncertainty. Investors tend to give in to fear and panic, which results in a widespread stock sell-off, no matter how strong the company is.
Musk therefore seems to advise against taking a margin loan during such periods. In 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 going to have very bad surprises.
The billionaire’s warning was shared by many users on Twitter.
“Or during any time. Margin is dangerous as the unexpected can happen,” commented one Twitter user.
“Best to never use margin loans,” quipped another user.
“The ubiquity of margin loans have made bubbles bigger and crashes more severe,” said another user.
“There’s going to be a reckoning this year,” commented another Twitter user.