Billionaire Elon Musk was sued over Twitter again in California last week, over alleged failure to pay bills.
Since Elon Musk took control of Twitter nearly four months ago, Writer Inc., a tech startup, is the sixth company to file suit against this social platform for breach of contract and unpaid payments. This most recent complaint comes as no surprise from an ever-growing list of aggrieved companies.
On October 27, 2022, the CEO of Tesla and SpaceX closed a mammoth $44 billion deal for popular social media giant Twitter. To fund this momentous purchase, Elon Musk sold billions in Tesla shares and procured loans worth over $13 billion which were backed by Twitter stock.
Subsequently, Writer and at least 5 other entities have filed lawsuits against Twitter for not compensating them properly.
– Columbia RET, owner of Twitter’s San Francisco headquarters
– Private Jet Services Group, private jet transportation provider
– Blueprint Studios Trends, event planning and production
– Mergers and Acquisitions advisory firm Innisfree M&A
Before Elon Musk acquired Twitter, Analysis Group furnished litigation consulting services to the social media platform and its advisors.
PlainSite, a renowned legal and public records database company, stayed ahead of the game by closely observing these lawsuits once they surfaced. According to credible sources such as CNBC and Al Arabiya.net, this has been validated.
Last week, Twitter made headlines when they denied their employees access to the Slack messaging platform after defaulting on payments for major companies. Sources close to Platformer reported that these bills went unpaid despite attempts at negotiations. This situation has caused a stir and some serious questions about how smoothly this business is running overall.
In the most recent lawsuit, presented in California Superior Court situated in San Francisco, Writer claimed that Twitter neglected to cover an invoice for a comparatively small sum of $113,856.
Musk has aired his worries and pointed out Twitter’s financial difficulties, tweeting last week: “No matter what people say about me, I just bought the world’s largest non-profit organization for a whopping 44 billion dollars – LOL”
Say what you want about me, but I acquired the world’s largest non-profit for $44B lol
— Elon Musk (@elonmusk) February 21, 2023
Red flags
According to Boston College finance professor Edith Hotchkiss haggles over late payments are prevalent in contracts that include a leveraged share.
According to Josh T. White, a finance professor at Vanderbilt University and a former SEC economist, the choices made by companies in regard to their capital structure are quite unprecedented; what’s more, he believes that non-payment disputes with vendors could be instigated due to this “improper and vigorous” approach.
When Musk’s Twitter acquisition was finalized, it saw an intense level of debt finance consisting of 30% funding and 70% equity. White pointed out that this bold strategy is risky for a business like Twitter which experiences inconsistent cash flow at times dipping into the negative margin – something we have observed in three consecutive years now.
Companies with steady income streams are the perfect candidates for debt buyouts, as they can service their debt and benefit from a tax shield due to being able to deduct interest expenses.
By leveraging more debt and lowering their equity stake, Musk and his stakeholders can minimize the amount of cash needed to contribute upfront – a strategy that could result in an even higher internal rate of return if Tesla ultimately proves successful. As White stated: “This measure could be quite advantageous.”
Despite stringent cost-saving tactics such as employee layoffs and reduced franchise ownership and infrastructure, Twitter is likely still having difficulty generating the necessary cash flow to fulfill its obligations. According to White, failure or refusal of payment can indicate that a business will soon confront serious monetary issues—a definite cause for alarm.
