What Is a Leveraged Buyout?

After a takeover battle for the history books, Elon Musk once again looks set to acquire Twitter. After backing out of the deal in July, Musk, who is set to acquire the social media company in an all-cash deal valued at $44 billion, changed his mind again, two weeks before the trial over the takeover dispute was set to begin. Earlier this year, Musk secured $25.5 billion in debt, backed in part by his stake in Tesla and partially by Twitter’s own assets, making the deal one of the largest leveraged buyouts in history.

A leveraged buyout is the acquisition of one company by another that is funded, often to a large extent, with borrowed money. The prospective buyer typically uses a combination of its own assets and the target company’s assets to secure the necessary loans and later uses the acquired company’s operating cash flows to pay off the debt.

So why would Elon Musk take out a giant loan to buy Twitter when he is worth more than $230 billion according to Forbes? Firstly, even the richest man alive doesn’t have $44 billion just sitting in his bank account. In fact, most of his wealth is tied up in Tesla stock that he can’t just sell overnight. And secondly, when you are the richest person on the planet planning to acquire an established, albeit not super profitable company, you get surprisingly good credit.

As opposed to most other leveraged buyouts, the buyer’s motives in this case aren’t financial, as Mr. Musk has repeatedly stressed. "Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated," Musk was quoted in the original announcement of the deal. "I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans. Twitter has tremendous potential – I look forward to working with the company and the community of users to unlock it."