By Allan Sloan
This is commentary by Allan Sloan, an independent business journalist and seven-time winner of the Loeb Award, business journalism's highest honor.
If you want an example of how strange the financial world can get, look at the different ways that two mutual fund companies are valuing the same security: the stock of X, formerly Twitter.
Twitter, of course, was taken over by Elon Musk, the CEO and "technoking" of Tesla, in October of 2022. He had 19 co-investors in the deal, including Fidelity and Baron Capital, which both run mutual funds.
As a result, some Fidelity and Baron funds ended up owning stock in X. Even though X shares aren't publicly traded, Fidelity and Baron have to value the stock because their mutual funds are bought and sold by investors based on the funds' net assets per share.
The difference between the way that Fidelity and Baron valued X, as you can see in the chart from Morningstar, is really striking.
As is the lurching around in valuations of X, especially from Baron.
Through the end of last year, Baron -- whose two biggest holdings as of this past Sept. 30 were Musk's publicly traded Tesla (8.6% of assets) and his nonpublic SpaceX (5.5%) -- was valuing X at more than double the value that Fidelity was giving it.
Now, as I'll explain in a bit, Fidelity might -- or might not -- have a higher value on X than Baron does.
Baron Capital founder Ron Baron -- not to be confused with Barron's founder Clarence Barron -- is a big Musk fan and a big showman.
For example, the annual Baron Investment Conference at New York City's Lincoln Center last month attracted thousands of investors, three of whom won Teslas that Baron raffled off. The conference, which traditionally offers a closing act from a surprise singer, concluded with songs by Michael Bublé, who has won five Grammy Awards.
Both the Baron and Fidelity fund families have investments in Musk's Tesla, SpaceX and X.ai in addition to their X stakes.
When you see the markdowns that Baron and Fidelity took almost immediately after the Twitter deal closed, you wonder if one reason that both firms invested in X might have been to make Musk happy.
"These funds were buying stakes in a private entity with no exit plan," Jack Shannon, a senior analyst at Morningstar told me. "That's something you don't see very often."
Fidelity declined to comment. Musk didn't respond to my email -- not even with his infamous poop emoji.
Baron Capital's spokesman sent a statement in response to my questions about the reasons for assigning such odd valuations to X. It said that Baron's "Fair Valuation Committee, which is overseen by an independent committee of the funds' board, relies on appropriate metrics to value nonpublic securities."
Baron's spokesman said the company's stake in X is a tiny percentage of its assets. That's also true of Fidelity.
Fidelity, which valued X at 100% of cost on Oct. 31, 2022, four days after the takeover was completed, was valuing it at only 43.88% by Nov. 30. This means that Fidelity's $316 million buyout investment lost $177 million for its investors in just one month.
Baron, which put $100 million into the buyout, valued its X stake at 70.20% of cost as of Dec. 31, 2022. (Baron discloses only quarterly figures while Fidelity releases monthly figures.) That's a $29.8 million investor loss over a two-month period.
While Fidelity was gradually reducing its valuation of X, Baron increased it sharply, to 89.52% of cost from the end of 2022 to the first quarter of 2023.
Then Baron reduced the value sharply for the second quarter, raised it slightly for the third quarter, and whacked it by more than two-thirds for the fourth quarter.
Hello? Where on earth do these wildly different numbers come from?
Baron's sharp year-end 2023 reduction in X's value put the Baron and Fidelity valuations in the same general area for the first time, following an extended period of Baron giving X a much higher valuation than Fidelity.
Then, in October, Fidelity sharply increased its valuation, to 28.13% of cost from September's 21.29%. What prompted this 32% increase? Fidelity declined to say.
Baron may also have increased its X valuation in October. But since it releases numbers only quarterly, any change won't show up until its year-end 2024 filings. (Baron declined to give me its October number.)
Regardless of whether you use Baron or Fidelity numbers, it's clear that the Twitter takeover has so far been a financial fiasco for Musk and his co-investors.
By my math, Musk et al. have about $33 billion invested in X. That's $44 billion to buy out Twitter's shareholders plus about $2.5 billion of expenses, less $13.5 billion that X borrowed.
Even at Fidelity's new, higher valuation, the original $33 billion of equity is down by about $23.7 billion. Musk is down about $18.6 billion; his co-investors (who put $7.1 billion into the deal) are down about $5.1 billion.
Sure, Musk, the world's richest person, may be able to laugh off those losses. But to Baron, Fidelity, and Musk's 17 other co-investors, those big losses are no laughing matter.
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December 12, 2024 16:04 ET (21:04 GMT)
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