Elon & Twitter Part III— The Gift that Keeps on Giving
This saga has been endlessly fascinating and especially interesting to watch unfold on Twitter in literal real time. I am absolutely certain this is one of the most complicated Mergers and Acquisitions deals to befuddle Wall Street in a in quite awhile.
This deal dynamic has an interesting twist. There is a lot of money at stake, as usual with a merger trade. If it completes at 54.20, you can leverage and buy a ton at a lower price and get 54.20 in cash later.
The biggest issues with this deal going through were, in roughly chronological order:
- Is Elon really serious? Even the price must be a joke, given the 420 reference.
- Is he going to be able to line up the financing? He would have to sell a lot of TSLA stock to finance it, and who else would go in with him on this?
- Can’t the TWTR board find a more “normal” acquirer, surely as an Internet treasure, a bigger company could swoop in to buy TWTR and do it right.
- Aren’t current shareholders going to sue the board, Elon, and their dogs, to stop this deal since it “obviously” undervalues TWTR at 54.20?
Let’s take it one at a time.
- Elon was serious. And given my read on his personality and his previous actions, the 420 suffix to the price was both an FU to the world and that he would do it anyway. It’s just a price — Wall Street has to get over that. You have to understand there exists a lot of animus towards him from traditional finance folks. Why? Because he is unpredictable and it makes it hard for them to understand how to predict outcomes and make money.
- He did line up the financing, with people like Larry Ellison and Sequoia coming in. These are good names, and it would be a mistake to think he didn’t think through these avenues before announcing the bid. And yes, he did sell billions of dollars of TSLA stock, personally.
- Nobody showed up. Not a single one. Twitter is not a good business, and they couldn’t even find someone to match Elon’s price let alone beat it.
- They did.
As discussed in my previous blog post, the inevitable lawsuit came from a shareholder, naming board members and Elon, etc. This is really common.
This is the time where things get tough as a trader, to really understand what is going on here. It’s tricky.
For one thing, it’s actually a good thing for the market to go down a lot. Any shareholder who thinks the 54.20 price was too low before the market fell 20%, has a lot less credibility today. Most shareholders are going to be like, I want the damn cash as soon as possible, in an environment like this. So a falling market actually increases the probability of the deal to go through.
But there is a catch. If the market falls ridiculously precipitously, then Elon has the choice to pay the $1 billion breakup fee and negotiate for a lower price. This is absolutely what a standard Wall Street buyout shark would do. These are the types of people where when the macro conditions deteriorate for a company, they would give their grandma over to get out of the deal.
So in the first scenario, the chances of TWTR being worth 54.20 soon are higher. But strangely in the second, where the market falls too much, you have to anticipate that the buyout price could actually be substantially lower.
More complexities abound. What do you set the new buyout price at? It’s clear Elon wants the company no matter what, which again is not traditional for an acquisition deal.
If you set it at 44.20, this would require another round of back and forth and could invite new lawsuits from other shareholders. But more importantly, in a period like this, markets are very very very volatile. Say 44.20 is set and the documents are drafted by lawyers and discussed with the board over the next few days. What happens if the market goes back up another 10%? It could happen. Even more lawsuits would follow if the board re-negotiated the deal down $10 while the market went back to initial levels.
This all clouds how to do this sort of transaction.
I’ll give my blunt take without having any access to special information in this unfolding deal. The Tweet Elon made at the top of this post was not an indication that he is going to renegotiate the terms to be a lower buyout price.
That would take awhile, earn the ire of the board, lots of papers have to be redrawn, etc. And Elon tends to do what he says, and sticks by it, despite that making him a black sheep in Wall Street circles. Wall Street firms finagle their way out of any contract they can.
His recent tweets also seem to indicate he is raring to go. Revenue and hiring plans, setting a new standard of commitment from the workforce, product ideas, etc. Any renegotiation could set the deal back by months.
So while it’s possible he will try for a lower price, I think the tweet he sent out is a traditional negotiating tactic against the people who are suing him to stop the deal. I used this exact tactic recently when negotiating over something and the other side balking.
“Oh, you think my price is too low?”
“It can always go lower.”