Elon Musk took loans to buy Twitter. Here's why it makes sense

Akshata Kamath
Akshata KamathOct 28, 2022 | 19:00

Elon Musk took loans to buy Twitter. Here's why it makes sense

There is a reason why Elon bought Twitter using loans. (Photo: Getty)

Though businessmen might be rich and have a lot of cash lying around, they might still prefer taking loans to buy a business. That is because getting a loan is quick and efficient, gives you tax deductions and allows you to invest your working capital elsewhere. 

So, Elon Musk finally bought Twitter for $44 billion and if you look at how this deal was financed, here's what the breakup seems to be like as per Al Jazeera

  1. $ 15.5 billion: Musk seems to have sold his Tesla shares in two waves, in April 2022 and in August 2022.
  2. $ 10.3 billion: Seems to be paid in Cash  
  3. $ 5.2 billion: Received from investment groups and other large funds like Larry Ellison (Oracle co-founder), Qatar Holding, etc who will now be Twitter shareholders.
  4. $ 13 billion: Bank loans from Morgan Stanley, Bank of America, Japanese banks Mitsubishi UFJ Financial Group and Mizuho, Barclays, and the French banks Societe Generale and BNP Paribas. These loans are guaranteed by Twitter and Twitter will assume the financial responsibility to pay them back, not Musk.
Photo: Getty Images

But, when Elon Musk is so rich, why does he have to take loans?

Well, entrepreneurs can acquire a company in multiple ways: They can always buy out a company in cash, opt for stock swaps, go for debt or equity financing or use earn-outs to pay for the company. Companies have to look for factors like profitability, share price, earnings, integration costs, quality of assets, and off-balance-sheet risks to choose the right financing technique to acquire another company. But when they opt for a loan, there seem to be a lot of benefits: 

1. Quick turnaround time: Leaders like Elon Musk save a lot of time by using bank financing to their advantage as it can be quick and more efficient than the process of trying to raise enough capital themselves.

2. Deductions: Interest payments on debt are usually allowed to be deducted from profits to a certain extent. Thus companies can use funds from banks and enjoy tax benefits along with growing their existing business. 

3. Don't have to put in your own money: Why would anyone block their own working capital when they buy a business, especially when it requires a large chunk of money to be invested? You could save your own money and use it elsewhere while using the bank's money to fund your business expansion.

Last updated: October 28, 2022 | 19:00
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