Elon Musk’s Twitter deal rewards Morgan Stanley’s risk

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

Its role in the $44 billion giving is exemplified in a years-long effort to cultivate relationships with the world’s richest person. The financing terms emphasize the risks that investment bankers are willing to take in order to gain profitable clients in the technology sector.

Morgan Stanley, along with Goldman Sachs, is one of two dominant investment banks operating in Silicon Valley. Backing Musk’s bid and recruiting nearly a dozen other banks to join Twitter investors indicated the seriousness of Musk’s efforts to buy the company. To consolidate the deal, Morgan Stanley is expanding Musk’s financial firepower beyond anything offered to other private clients.

Morgan Stanley will take the largest role in a consortium of 12 banks that gives Musk $12.5 billion in margin loans guaranteed by shares in Tesla, the electric car company he leads. Morgan Stanley agreed to lend $2 billion of the amount.

The loan is much larger than what Morgan Stanley provided to wealthy individuals in the past. The largest margin loans it has made to clients through its own bank have usually been less than $1 billion, according to a person familiar with Morgan Stanley’s lending operations.

As a guarantee, Musk also offered only a portion of his shares in Tesla. Margin loans are usually offered against a more diversified investment portfolio.

“It’s clearly a higher risk than your standard business dealings,” said Jill Fish, professor of business law at the University of Pennsylvania. “But I think there is a potential upside to being associated with these types of transactions and with this kind of insight.”

Musk is also financing his Twitter offer with a $13 billion debt fund led by Morgan Stanley, much of which is likely to be distributed to other investors. Last week, the billionaire also sold $8.5 billion of Tesla stock as he looks to fund the $21 billion in cash that he agreed to use in the deal.

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

Ultimately, the two banks committed about $9.7 billion in financing from a total of $25.5 billion in debt and margin loans to be used in the deal, according to FTSE public filings.

The deal was complicated by the fact that Musk’s initial offer on Twitter was not required. Large banks such as Morgan Stanley warn against working with hostile bidders for fear of upsetting other corporate clients. A former senior executive at Morgan Stanley said bankers often had to get approval from CEO James Gorman to work on such deals.

Morgan Stanley and MUFG declined to comment. Jared Birshall, head of the Musk family bureau and former banker at Morgan Stanley, did not respond to a request for comment.

Whatever the financial risks and returns from the deal, these generous credit terms also reflect the banks’ attractiveness to cement a 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 startup SpaceX, tunneling venture The Boring Company and neuroscience startup Neuralink — that could offer new business if they go public.

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

Adding to Morgan Stanley’s ability to make commitments the size of Musk’s loan have been deposits that have doubled in the past three years to about $380 billion, largely reflecting Gorman’s push to manage more money for wealthy clients. Deposits provide access to a cheap source of money for lending.

Morgan Stanley and Goldman were among the first New York investment banks to build large operations in Northern California, catering to technology clients during the dotcom boom of the 1990s. Since then, arch-rivals have led the playing field for hot initial public offerings and takeover mandates, taking in nearly a quarter of this year’s total of $2.9 billion in technology M&A fees, 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 to Twitter’s bid far exceeds anything Musk has loaned in the past. Between 2016 and 2020, Morgan Stanley took loans owed to Musk ranging between $208.9 million and $344 million.

Technology investment bankers at Morgan Stanley, including Michael Grimes and Colin Stewart, have maintained close relationships with Musk going back at least as far back as Tesla’s initial public offering in 2010, according to a person familiar with the relationship.

Goldman led this IPO and has also been a lender to Musk since at least 2010. The bank previously advised Twitter in its fight with activist investor Elliott Management in 2020, and worked again at the social media company as Musk began building his stake.

When Musk in 2018 was looking to make Tesla private at $420 per share, he first tapped Goldman to help direct his bid. He later added Morgan Stanley as an advisor after it became clear that he would need to create a broader network to secure funding for the potential deal.

As Morgan Stanley pressed its case to participate in the proposed deal, the bank has sought recognition as a “robust supplier” to Tesla and Musk over the years, Birchall wrote in a text message to the businessman.

In the letter that appeared as evidence this month in a lawsuit that emerged from the failed deal, Birshall wrote that Morgan Stanley had funded Musk in the past and “come in” each time Musk’s team lobbied for more credit or lower prices.

Birchall told Musk that the bank also did “a lot of work for TBC for free,” likely referring to The Boring Company. The appeal came a day after Musk said he was working with Goldman and private equity group Silver Lake on the deal.

“That seems fair,” Musk replied.

Leave a Comment