Example of focusing on liquidity and solvency

One example of focusing on liquidity and solvency involves buyouts of company which change capital structures trading significant debt for equity. Elon Musk's current effort to buy Twitter is an example. There are mixed views on whether or not the deal will be completed. Recently Twitter shares closed at a 10% discount to the buyout price (21% annualized) indicating the risk premium of holding shares until the deal goes through (Bary, 2022). Some of the liquidity risks are specific to Musk. He has margined $12.5 million using Tesla stock to help finance the deal and a drop in Tesla stock could pressure him (Bary). Estimates are that annual interest expenses will increase from $51 million to $600 million based on an estimate of net debt of $10 billion (Bary). Based on the leverage, Twitter's debt rating could fall from high-junk level ratings of Ba2 to single-B (Bary). Musk's ability to raise revenues and to cut costs will be important to long-term success.