Musk-Twitter Deal: What Happens When a Company Goes Private?
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Tesla CEO Elon Musk is set to finally complete his acquisition of Twitter on Friday, according to a Bloomberg News report. Musk will pay $54.20 per share to take the social media company private at a valuation of about $44 billion.
Musk’s plans for Twitter have caused controversy. He has indicated that he intends to fire most of Twitter’s staff and loosen its rules against misinformation and hate speech, drawing criticism from civil rights organizations such as the Anti-Defamation League.
His plans have also caused confusion. After months of uncertainty about the fate of the deal, some Twitter shareholders might be wondering what will actually happen to their shares if Musk takes control Friday.
Here’s what happens when a publicly traded company goes private — and how financial advisors say it could affect your portfolio and tax bill.
What happens when a company goes private?
Twitter shareholders have already voted in favor of Musk’s takeover offer.
Louis Barajas, a certified financial planner based in Irvine, California, described the next steps.
“When a publicly traded company becomes a privately-held company, the public company's shares are purchased at a premium by the investors buying the company. The company is delisted from the stock exchange where its shares formerly traded,” he said in an email interview.
Daniel Henn, a certified public accountant in Rockledge, Florida, said in an email interview that “it will take a few days to a few weeks” for shareholders to receive their money.
What are the tax implications for shareholders?
Henn said that when a publicly traded company such as Twitter is acquired and taken private, shareholders pay capital gains tax as if they had sold the stock. They’ll be taxed at either the short-term capital gains rate, which is paid on assets held less than a year, or the lower long-term capital gains rate. It will just depend on how long they’ve owned the stock.
“If they bought Twitter the day before the deal closed, it would be short-term. It would still be short-term if they held it up to 365 days,” he said. “If they held it for a year and a day, then it is long-term,” he said.
He added that capital gains tax is only applicable if a shareholder owns Twitter in a taxable brokerage account. Shareholders will not owe capital gains tax if they own shares in a tax-advantaged account like an IRA.
What should investors do with the money?
Barajas gave a simple piece of advice to investors who are expecting a payout from their Twitter shares: “Take cash proceeds and reinvest or rebalance your portfolio.”
Rebalancing means putting more money into the underperforming parts of your portfolio to bring all of its parts back to their intended proportions.
For example, suppose that half of your portfolio is invested in a total stock market index fund, and the other half is invested in a bond market index fund. Now imagine that the stock market fund has declined 20% over the last year, while the bond market fund has stayed flat. Rebalancing would mean increasing your holdings of the stock market fund by 25% to bring the two funds back to their original 50-50 ratio in your portfolio.
Rebalancing is an important part of maintaining diversification in your portfolio.
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What’s next for Twitter?
Musk’s purchase of Twitter could have far-reaching consequences for the platform. He called Twitter “the digital town square where matters vital to the future of humanity are debated,” in an April 25 tweet. He’s also made it clear that he wants to make changes to that town square — and to those debates.
Many of those changes involve Twitter’s business model. Musk has suggested that he intends to move the platform away from advertising revenue and toward subscription revenue, accept payments in cryptocurrency, strengthen its anti-spam measures and reveal its timeline algorithm to the public, for example.
Musk has been critical of Twitter’s content moderation policies, saying at a Financial Times conference in May that the platform “needs to be more even-handed” because it “currently has a strong left bias.” He has also suggested that he might reinstate the account of former President Donald Trump, who was accused of inciting violence and banned by the platform in January 2021.
The long-term effects of those proposed changes remain to be seen, but the acquisition process should play out in a predictable way over the next few weeks.
If you’re a Twitter shareholder, you should expect to receive $54.20 per share in the next few weeks, and then a capital gains tax bill next April (assuming that you hold shares in a brokerage account).