If Elon Musk Is the Richest Man in the World, How Can Twitter Declare Bankruptcy?
Elon Musk’s takeover of Twitter has gone so far off the rails in such a short period of time that he might have to take the social media platform into bankruptcy only weeks after acquiring it. This might be bad news for Twitter, but the Tesla CEO and world’s richest person probably won’t feel much financial pain himself.
As NPR reported, Musk has reportedly told staff that bankruptcy could be in the offing if Twitter doesn’t start making more money. Musk took the company private last month with a $44 billion buyout. In the process, he cashed in some of his Tesla stock but also saddled Twitter with $13 billion in debt.
The problem is, Twitter generated only $632 million in cash flow last year to pay for debt and other expenses, NPR noted. The company’s current debt is roughly seven times its projected 2022 earnings.
Another pressing problem is that about $1.2 billion of annual interest payments from the Twitter acquisition are coming due, Bloomberg reported. This means Twitter must produce revenue and cash quickly, but Musk’s mishandling of the takeover has led to an exodus of brands that has caused the company to lose an estimated $4 million a day.
Given these numbers, bankruptcy might be the most financially sound option right now. This would allow investors and other lenders to take over Twitter during bankruptcy while Musk still serves as CEO, according to Andy Wu, assistant professor at Harvard’s business school.
“Bankruptcy would also allow Musk to refinance the debt, which would make the company more financially stable,” Wu told NPR.
If you wonder how someone worth an estimated $185 billion can take one of his flailing businesses into bankruptcy, it’s because the business and the owner are two separate entities. As the Medium website put it: Business finances are “ringfenced” from personal finances, which allows even the ultra-wealthy to defend their personal assets in the event of a major business failure.
In terms of bankruptcy options, there are three main types, Forbes reported: Chapter 7, Chapter 11 and Chapter 13.
In Chapter 7, also known as liquidation bankruptcy, most of the debtor’s assets are sold to pay creditors. Almost all Chapter 7 filers get at least some of their debts discharged. With Chapter 13, the debtor can keep more of their property by agreeing to repay debts over a longer period of time — typically three to five years.
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However, a large and well-established company like Twitter is most likely to go the Chapter 11 route. Chapter 11 is frequently referred to as a “reorganization” bankruptcy, according to USCourts.gov. The debtor typically remains “in possession” of the business. The debtor also has the powers and duties of a trustee, can continue to operate the business, and can even borrow money with the court’s approval. If enough creditors approve the plan, and it meets certain legal requirements, it can then be confirmed by the court.
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