Forbes illustration; Photos by Rouzes/Getty Images, Pool/Getty Images
Elon Musk has accomplished many great things, including pioneering a new era of manned space travel. He has also done all these things:
- Done a joke about a US congressman’s penis.
- He suggested that concern about a potentially lethal disease, covid-19, was “foolish.”
- Started a hostile takeover by file evil SEC document that instead stated that it was not start a hostile takeover.
- Done a joke about Bill Gates’s penis.
- He suggested an acquisition of Coca-Cola to “put the cocaine back.”
- Compared a Canadian prime minister to Hitler.
That Elon, what a fool. Serious one minute, unserious the next. He is a guy who likes to have fun, and we should all have more fun, he told us on Wednesday at 9:53 p.m.
But some people apparently don’t like fun. Or at least not the uncertain, Musk-esque fun and skepticism about him and whether he will seriously finish his $44 billion deal. privatize twitter it is hanging in action. That’s why there remains a persistently large gap between its board-approved offer ($54.20 per share) and Twitter’s current share price ($49.11 as of Thursday’s close). “The market sees potential concern as to its fickle nature,” says David P. Brown, a University of Wisconsin professor who studies stock markets. “Even if you are doing your due diligence.”
As any merger and acquisition concludes, it is quite common to see a spread between the price of an offer and the price of a stock. Closing a deal is complicated. Sometimes they don’t happen. Usually they do. However, every now and then something goes wrong.
There is an easy indicator of investor confidence in the successful conclusion of a transaction: How big is the gap between the offer and the stock prices as the deal is completed? In operations in which the acquirer is a known and trusted entity, the spread is usually between 2% and 3%. “Like when Warren Buffett and Berkshire Hathaway shut something down,” says David Stowell, a finance professor at Northwestern University’s Kellogg School of Management.
On Thursday, the spread between Musk’s price and Twitter shares reached 11% before ending at around 9%. Investors say they believe the Musk-Twitter deal is three to four times more uncertain than the average M&A. And given who’s doing the A on this one, Musk the chump, such trepidation may not be entirely unreasonable. (Are you really kidding about investing in Coke? Yes, probably? But the market thrives on clarity, not so much joking ambiguity, and once you make it a defining characteristic of yours, the market has trouble judging what’s going on).
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everything continues to point to Musk being able to successfully complete the deal (publicly committed bank funding, board approval) and it will be hard to find anyone on Wall Street or Silicon Valley with much conviction to the contrary. The media is another matter, and Musk has spent the week irritating journalists by suggesting that he will make significant changes to weaken Twitter’s moderation policies; Journalists have long called on Twitter to do the opposite.
On Wednesday, a lengthy Reuters column speculated the whole Musk-Twitter was a ruse. A day later, New York University professor and podcast commentator Scott Galloway postulate that Musk sees the whole thing as a giant options trade but has no intention of closing out, i.e. buying Twitter, with Twitter’s $1bn breakout fee acting as the premium. (A breakup fee is the standard M&A fee; if one party backs out, they pay it. Fees are typically around 3%, and that’s about what Musk got.) Later on Thursday, Dan Primack, the business editor at Axios who has spent a lot of time covering venture capital, private equity, and M&A in an industry bible newsletter, had this to say:
What could prove the media right and prevent Musk from getting Twitter? Us talked about all this on Tuesday, but given the continued glut of the stock, let’s review.
Musk could just change his mind and decide he doesn’t want to anymore. (This isn’t something you’d expect from the world’s richest person/public company CEO, but as we’ve already established, Musk doesn’t act like anything typical. He commits Elon Acts: unpredictable, bizarre. (Impossible to predict!) It’s Elon Acts.) If he changes his mind on this latest Elon Act, Twitter could sue him, forcing the transaction, or wash their hands of it, letting him pay the $1 billion breakup fee.
Another bidder could come forward with an offer higher than Musk’s, though that seems highly unlikely. Twitter almost certainly tried to find a buyer other than Musk when he first showed up and couldn’t.
Regulators could stop Musk. But that also seems unlikely. Sure, he and the SEC have had their problems. But the SEC has no authority here. It’s FTC territory. And the FTC is unlikely to see anything monopolistic in a car tycoon buying a digital media company. The European authorities could be a little more problematic, and an official from the European Union said to financial times that the bloc expects Musk and Twitter to abide by its moderation rules, which are stricter than those of the United States. (The official’s comments came too quickly after the deal announcement to be anything more than a warning shot in Musk’s general direction.) Still, Europeans will generally assess antitrust concerns the same as their American peers. And, again, Teslas and Tweets do not exist in the same market.
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Two other things could trip up Musk, and we could sit down and argue about which has the slightly better chance of happening. Regardless, both are unlikely scenarios.
In one, Musk’s funding fails. Not the $13 billion in typical leveraged buyout loans that Twitter Inc. will dangerously assume, but the $12.5 billion in margin loans secured by Musk’s Tesla shares. They are available to him only as long as he posts Tesla stock as collateral.
Tesla shares have been volatile lately and possibly overvalued, the two factors intertwined. And we have seen a recent drop in Tesla stock. They have fallen 13.5% in the past five days, likely as a result of investors realizing that Musk will need to sell some of his 243 million Tesla shares to pay for an additional third of Twitter’s funding.
But let’s assume there’s no Tesla-specific bad news between now and the fall, which is about how long it will take to close Musk’s Twitter deal. There could still be some unexpected macroeconomic event, such as a bout of historically high inflation or some conflict between world superpowers. “Now imagine something like that, which would cause a drastic drop in stocks,” says Brown, a professor at the University of Wisconsin. The widespread drop in share prices would send investors scrambling to sell expensive and riskier stocks, such as Tesla, which is currently trading at a staggering 118.6 times earnings.
Musk is in good shape with his margin loans unless Tesla shares hit around $750 or so. At that point, you may need to post more collateral to keep the full loan, or decide it’s not worth it and walk away. He would pay the $1 billion breakup fee, but heck, he’d still have many billions more. Perhaps that sounds easier than renegotiating with your lenders during a financial crisis while running several businesses and trying to close another, which has historically struggled to turn a profit even in prosperous macroeconomic times when you didn’t have LBO debt piled on it.
Second scenario: Musk makes his public offer to shareholders and they reject it. Now, Musk almost certainly went through a list of Twitter’s institutional shareholders, the ones with the most at stake and the most votes, and decided that he won enough to win the vote. But for sure there is a very slim chance that maybe the media buzz about Twitter and Musk’s proposed changes will grow big enough, scaring off shareholders, who then push back against Musk.
We haven’t talked at all about a different series of events where Musk may buy Twitter in 2022, but then a whirlwind of all these things: a financial downturn, margin calls, Tesla underperforming, the general headache of running Twitter as its needs to cut costs and add new revenue streams, leading to another Elon’s Law. In that, he sells a very small Twitter to someone interested in it due to its town square feature or maybe he turns a much smaller Twitter into a non-profit organization that he controls himself or not. Co-founder Jack Dorsey expressed his confidence in Musk and, at the same time, said that he believes the $5.1 billion (sales) business he ran twice should not be a for-profit business.
If you go back and count the ifs, maybes, and buts in the paragraphs above, you get the feeling that, yes, Musk is very likely going with Twitter. Nonetheless, he will have a better idea of why investors are treating this deal more cautiously, three or four times more cautiously than they would otherwise. At some later point, we can regroup and decide whether buying Musk on Twitter belongs on the list of “great things” or the list of less noble things, next to the fictional inauguration and penis jokes.