Elon Musk’s Twitter deal rewards risk-taking at Morgan Stanley

Elon Musk’s Twitter deal rewards risk-taking at Morgan Stanley

Elon Musk's Twitter deal rewards risk-taking at Morgan Stanley

When Twitter’s board agreed to sell the company to Elon Musk last week, a Wall Street bank was at the center of the deal: Morgan Stanley.

His role in the $44 billion bid caps a years-long effort to cultivate ties with the world’s richest person. The funding terms underscore the risks investment bankers are willing to take on to win lucrative tech clients.

Morgan Stanley, along with Goldman Sachs, is one of the two major investment banks operating in Silicon Valley. Backing Musk’s bid and recruiting nearly a dozen other banks to join signaled to Twitter investors the seriousness of Musk’s efforts to buy the company. To seal the deal, Morgan Stanley is extending financial firepower to Musk that goes beyond anything provided to other private clients.

Morgan Stanley will play the largest role in a consortium of 12 banks providing Musk with $12.5 billion in margin loans secured by shares in Tesla, the electric vehicle company he leads. Morgan Stanley agreed to lend $2 billion of the sum.

The loan is far larger than what Morgan Stanley has offered wealthy individuals in the past. According to a person familiar with Morgan Stanley’s lending operations, the largest margin loans it has offered to clients through its private bank have typically been below $1 billion.

As collateral, Musk also offered only part of his shares in Tesla. Margin loans are generally made on a more diversified portfolio of investments.

“Obviously it’s a higher risk than your standard business transaction,” said Jill Fisch, a business law professor at the University of Pennsylvania. “But I think there’s a potential upside to being associated with those kinds of deals and that kind of vision.”

Musk is additionally funding his Twitter offering with $13 billion in debt financing led by Morgan Stanley, much of which will likely be syndicated to other investors. Last week, the billionaire also sold $8.5 billion worth of Tesla stock as he seeks to fund the $21 billion in cash he agreed to use as part of the deal.

In another sign of their willingness to pour money into Musk’s bid, Morgan Stanley and Japanese lender MUFG, which owns a 21% stake in the Wall Street bank, had leeway from their credit committees to provide up to $14 billion of total debt. for Musk’s bid if needed, a person familiar with the matter said.

Ultimately, the two banks committed about $9.7 billion in funding out of a total of $25.5 billion in debt and margin loans to be used for the deal, according to Financial Times calculations. public records.

The deal was complicated by the fact that Musk’s initial offer for Twitter was unsolicited. Big banks such as Morgan Stanley are cautious about working with hostile bidders for fear of angering other corporate clients. A former senior Morgan Stanley executive said bankers often must receive approval from chief executive James Gorman to work on such deals.

Morgan Stanley and MUFG declined to comment. Jared Birchall, the head of Musk’s family office and former Morgan Stanley banker, did not respond to a request for comment.

Regardless of the financial risks and returns of the deal, such generous credit terms also reflect the allure for banks to cement the relationship with Musk, who has a net worth of more than $200 billion.

Transactions involving technology companies and their founders generate significant bank fees. Musk has also founded three private companies — rocket start-up SpaceX, tunneling firm The Boring Company and neuroscience start-up Neuralink — that could generate new business if they go public.

“I would estimate a dozen banks would love to do this,” said a former senior risk executive at a rival Wall Street bank. “They see it as a way to get into a super important relationship.”

In addition to Morgan Stanley’s ability to make commitments the size of the Musk loan, deposits have doubled in the past three years to around $380 billion, largely reflecting Gorman’s desire to manage more money for wealthy clients. Deposits provide access to a source of cheap money to lend.

Morgan Stanley and Goldman were among the first New York-based investment banks to build large operations in Northern California, catering to tech clients during the dotcom boom of the 1990s. The main rivals have since dominated the playing field for initial public offerings and takeover warrants, winning about a quarter of the $2.9 billion in total tech M&A fees this year, according to data compiled by Dealogic.

Musk has had a banking relationship with Morgan Stanley since at least May 2011, according to regulatory filings, but the $2 billion margin loan offered for the Twitter offering far exceeds anything he’s lent to Musk in the past. . Between 2016 and 2020, Morgan Stanley had outstanding loans to Musk of between $208.9 million and $344 million.

Morgan Stanley technology investment bankers, including Michael Grimes and Colin Stewart, have maintained close ties to Musk since at least Tesla’s IPO in 2010, according to a person familiar with the relationship.

Goldman led that IPO and has also been a lender to Musk since at least 2010. The bank previously advised Twitter in its battle with activist investor Elliott Management in 2020, and worked for the social media company again as Musk was starting to build his stake.

When Musk in 2018 was looking to take Tesla private at $420 a share, he first tapped Goldman to help guide his offer. He then added Morgan Stanley as an adviser after it became clear he would need to cast a wider net to secure funding for the potential deal.

While Morgan Stanley insisted on being involved in the proposed deal, the bank sought recognition for “being a strong resource for Tesla” and Musk over the years, Birchall wrote in a text message to the entrepreneur.

Morgan Stanley had funded Musk in the past and “got away with it” whenever Musk’s team pushed for more credit or lower rates, Birchall wrote in the post, which emerged as evidence this month- ci in a lawsuit resulting from the failure of the transaction.

Birchall told Musk that the bank had also “done a lot of work for TBC at no cost,” likely in reference to The Boring Company. The call came a day after Musk announced he was working with Goldman and private equity group Silver Lake on the deal.

“That seems fair,” Musk replied.

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