Twitter against Musk: the first S
On Friday, Elon Musk’s lawyers sent a letter to Twitter Inc. (TWTR, Financial) informing the company that the billionaire was withdrawing from his acquisition agreement. He also filed the letter with the SEC.
Musk says Twitter hasn’t given him enough information about fake accounts or “bots” on its platform, so he suspects the fake accounts are far more than the roughly 5% claimed by the company. Therefore, he is entitled to withdraw from the agreement. Musk’s attorney, Mike Ringler, claimed in the letter that for nearly two months he had been researching data to judge the prevalence of fake or spam accounts on the social media platform, but that the company had not provided the information adequately.
Reputedly the richest person in the world, Musk, who controls companies like Tesla Inc. (TSLA, Financial) and privately held SpaceX, launched its campaign to acquire the social networking company on or around April 4. At that time, he revealed that he had acquired 9% of Twitter shares and was seeking a seat on the board. After some back and forth with the company to join the board, he backtracked and announced his intention to take over the entire company.
On April 25, Twitter announced that it had reached an agreement to sell itself to Musk for $54.20 per share.
Musk filed documents detailing committed financing put in place to fund the acquisition provided by a consortium of banks and comprised of a senior secured bank facility, secured and unsecured bonds, a prime loan facility (using Musk’s Tesla shares as collateral) and a capital contribution. .
However, shortly after the deal was finalized, which appeared to have been reached without much due diligence on Musk’s part in early May, he said in a tweet that “the Twitter deal [is] temporarily on hold pending details supporting the calculation that spam/fake accounts indeed represent less than 5% of users. accounts and their liability for less than 5% of its monetizable daily active users. He added unreassuringly in a follow-up tweet that he was still committed to the deal.
Shares of Twitter soon plunged, settling at around a third discount to the deal price, showing considerable doubt that a deal would be completed at the agreed price. It seems to me that Musk is experiencing acute buyer’s remorse and, followed by the bear market, is using the fake account problem to renegotiate the price he had previously agreed.
The following chart shows the price action for Twitter and Tesla (the electric vehicle company of which Musk controls about 17% of the shares). Tesla stock has fallen around 30% since the start of the year, which is probably one of the main reasons he wants to get out of the deal, as it has reduced his overall net worth, because Tesla stock makes up a large portion of his net worth. According to reports, Musk’s net worth has plummeted by $65 billion since he announced he wanted to buy Twitter.
Twitter raises the Gauntlet
It seems that Twitter has taken up the gauntlet thrown down by Musk. Twitter Chairman Bret Taylor tweeted on Friday that the board is “committed to completing the transaction on the price and terms agreed to with Mr. Musk and plans to take legal action to enforce compliance.” merger agreement. We are confident we will prevail in the Delaware Court of Chancery.”
Though Twitter may seek a billion dollar fee, Musk has agreed to pay if the deal falls through, but instead appears willing to force the deal to close, which the company’s board has said. approved and CEO Parag Agrawal insisted that he wanted to make it happen. Alternatively, the court could award sweeping damages to Twitter if it finds that it was Musk who reneged on the deal. The damages could be far greater than the $1 billion breach fee and could include damages for the lost opportunity as well as the stock price drop as a result of Musk’s antics.
So how and when will the second shoe drop?
There is a quote attributed to the 19th century German general and strategist, Carl Von Clausewitz, who said, “We maintain…that war is simply a continuation of political relations, with the addition of other means.
We can say the same about litigation – it is a continuation of negotiations with the addition of other means.
Litigation involves a lot of public posturing, smoke and mirrors, and bravado as the protagonists assert their position. However, in the end, all the drama comes to a halt under the harsh light of the courtroom and the skeptical gaze of a judge. The litigants are forced to reckon with the Sword of Damocles suspended above their heads because, when it falls at the end of the trial, one of the litigants will be beheaded.
I expect Twitter to file a lawsuit very soon in the Delaware Court of Chancery. Musk has announced his intention to walk away from the deal since mid-May, and Twitter is likely ready to take legal action. Given that time is on Musk’s side, I would expect Twitter to file a motion seeking an expedited trial, citing irreparable and escalating reputational damage resulting from his unproven claim on misleading fake accounts as well as the loss of talent and customers. If an expedited schedule is granted, expect the issue to be resolved quickly as both parties will be under fire to fish or cut the bait. At first glance, Musk doesn’t seem to have a good claim. Since he is reneging on the contract based on alleged misrepresentations by Twitter, the onus is on him to prove his allegation.
Currently, there is a 32% spread between the transaction price and the current Twitter stock price. This spread is likely to grow in the coming weeks as litigants step up the rhetoric and more details emerge. Assuming a settlement is reached for a 20% discount on the transaction price ($54.20 minus 20% equals $43.36), Twitter is still trading at an additional discount of approximately 18%. So, in my opinion, the arbitrage spread is excessive and negotiable against long positions on Twitter because there is a good chance that the turmoil will be over in a few months.
From my observations, over 90% of all commercial disputes are resolved. Musk and Twitter’s board are realizing (or they’ll be up, soon enough) that the longer this drags on, the more damaged they’ll both be. So either Twitter will take a cash payment from Musk (I’m guessing it’s probably in the $2 billion range) for Musk to walk away or accept a price cut (I’m guessing it’s acts a discount of 10% to 20%) to close the deal. If the case ends in a trial, the judge will likely be tempted to let Musk off the hook by making him pay Twitter’s $1 billion fees and costs, rather than force a deal on a landlord reluctant and unpredictable to the detriment of employees and the public. So I think it’s in Twitter’s best interest to negotiate a reasonable conclusion and move on.
According to the GF Value chart, Twitter is currently significantly undervalued. The GF value is slightly higher at $61.
There is also an alternate scenario in which a white (or black) knight will emerge and offer to buy Twitter at a discount, then allow the company to continue to sue Musk for damages. This scenario could put pressure on Musk to settle down. I imagine discussions are taking place in the C-suites of these potential media and technology acquirers to strategize for this unique media property with huge unmonetized potential.
Overall, Mr. Market offers an intriguing high-risk, high-reward merger arbitrage opportunity.