Illustration by Forbes; Photos by Rouzes/Getty Images, Pool/Getty Images
Elon Musk has accomplished many great things, like pioneering a new era of manned space travel. He’s also done all these things:
- Made a penis joke about a U.S. Congressman.
- Suggested that concern about a potentially lethal disease, Covid-19, was “dumb.”
- Initiated a hostile takeover by filing the wrong SEC document that instead indicated he wasn’t beginning a hostile takeover.
- Made a penis joke about Bill Gates.
- Suggested a takeover of Coca-Cola to “put the cocaine back in.”
- Compared a Canadian prime minister to Hitler.
That Elon, what a goof. Serious one minute, unserious the next. He’s guy who likes to have fun—and we should all have more fun, he told us as recently as Wednesday at 9:53 p.m.
But some people seemingly don’t like fun. Or at least not the uncertain, Musk-type fun, and their skepticism about him and whether he’ll seriously finish his $44 billion deal to privatize Twitter is hanging on the stock. That’s why there remains a persistently large gap between his board-approved offer ($54.20 a share) and Twitter’s current share price ($49.11 at Thursday’s close). “The market sees a possible concern as to his mercurial nature,” says David P. Brown, a University of Wisconsin professor who studies securities markets. “Even if he is doing his due diligence.”
As any M&A concludes, it’s pretty common to see a spread between an offer price and a stock price. Closing a deal is complicated. Sometimes they don’t go through. Usually, they do. Yet every so often something goes wrong.
There’s an easy gauge for investor confidence in a transaction’s successful conclusion: How big is the gap between the offer and stock prices as a deal winds to completion? In deals where an acquirer is a trusted, well-known entity, the spread is often still 2% to 3%. “Like when Warren Buffett and Berkshire Hathaway close on something,” says David Stowell, a finance professor at Northwestern University’s Kellogg School of Management.
On Thursday, the spread between the Musk price and Twitter stock was as much as 11% before finishing at around 9%. Investors are saying they think the Musk-Twitter deal is three to four times more uncertain than your average piece of M&A. And given who is doing the A in this case—Musk, that goof—such trepidation may not be wholly unreasonable. (Is he actually joking about investing in Coke? Yes, probably? But the market thrives on clarity, less so on joke-y ambiguity, and once you make it a defining characteristic of yours, the market has trouble weighing what’s going on.)
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verything still points to Musk being able to successfully conclude the deal—publicly committed bank financing, board approval—and you’ll be hard pressed to find someone on Wall Street or in Silicon Valley with a great deal of conviction to the contrary. The media is another matter, and Musk has spent the week riling up journalists by suggesting he’ll 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 everything Musk-Twitter was a ruse. A day later, NYU professor-cum-podcaster Scott Galloway posited that Musk sees the entire thing like one giant options trade but has no intentions of closing out—that is, actually buying Twitter—with Twitter’s $1 billion breakup fee acting as the premium. (A breakup fee is standard M&A fare; if one side backs out, it pays it. Fees are usually around 3%, and that’s just about what Musk got.) Later Thursday, Dan Primack, the Axios business editor who has spent a long time covering venture capital, private equity and M&A in an industry-bible newsletter, said this:
What could prove the media correct—and stop Musk from getting Twitter? We talked about all this on Tuesday, but given the continuing overhang on the stock, let’s review.
Musk might simply change his mind and decide he doesn’t want to anymore. (This isn’t something you’d expect from the world’s richest person/a public company CEO, but then as we’ve already established, Musk doesn’t act like a typical anything. He commits Acts of Elon—unpredictable, brow-furrowing actions. They’re impossible to forecast for! They’re Acts of Elon.) If he did change his mind in this latest Act of Elon, Twitter could sue him, forcing through the transaction, or wash its hands of him, letting him pay the $1 billion breakup fee.
Another bidder could step in with a higher offer than Musk’s, though that seems highly unlikely. Twitter almost certainly tried to find a non-Musk acquirer when he first appeared and couldn’t.
Regulators could stop Musk. But that seems unlikely, too. Sure, he and the SEC have had their beefs. But the SEC has no authority here. It’s the FTC’s turf. And the FTC is unlikely to see anything monopolistic about a car mogul buying a digital-media company. European authorities could be a bit more problematic, and one European Union official told the Financial Times that the bloc fully expects Musk and Twitter to abide by its moderation rules, which are more stringent than America’s. (The official’s comments came too quickly after the deal’s announcement to be anything but a warning shot fired in Musk’s general direction.) Still, the Europeans will generally be assessing anti-trust concerns just like their American peers. And, again, Teslas and tweets don’t exist in the same marketplace.
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wo other things could trip up Musk, and we could sit and argue about which has the ever-so-slightly better odds of happening. Regardless, they’re both long-shot scenarios.
In one, Musk’s financing falls through. Not the $13 billion in typical leveraged buyout loans that Twitter Inc. will perilously assume, but the $12.5 billion in margin loans secured by Musk’s Tesla shares. They’re available to him only as long as he posts Tesla stock as collateral.
Tesla stock has lately both been volatile and, quite arguably, overvalued, the two factors twined together. And we have seen a recent drop in Tesla shares. They’ve fallen 13.5% in the last five days, likely the result of investors realizing Musk will need to sell some of his 243 million Tesla shares to pay for an additional third part of Twitter financing.
But let’s assume there’s no bad Tesla-specific news between now and the fall, which is about how long it’ll take to close Musk’s Twitter deal. There could still be some unexpected macroeconomic event, like a bout of historically high inflation or some conflict between global superpowers. “Now imagine something like that—that would cause a drastic drop in stocks,” says Brown, the University of Wisconsin professor. Broadly falling equity prices would send investors rushing to sell expensive, riskier stocks, such as Tesla, which currently trades at an eye-watering 118.6 times earnings.
Musk is in good shape with his margin loans unless Tesla shares get to around $750 or so. At that point, he might need to either pony up more collateral to keep the full loan—or decide it’s not worth it and walks away. He’d pay the $1 billion breakup fee, but heck, he’d still have many billions more. Maybe that seems easier than renegotiating with your lenders during a financial crisis while you’re running several companies and trying to close on another, which has historically struggled to turn a profit even in prosperous macroeconomic times when it didn’t also have LBO debt piled on it.
Second scenario: Musk makes his tender offer to shareholders, and they reject it. Now, Musk has almost certainly gone through a roll of Twitter’s institutional shareholders—the ones with the biggest stakes and the most votes—and decided he’s won over enough to triumph in the vote. But sure there’s a very slight chance that maybe the media drumbeat about Twitter and Musk’s proposed changes grow loud enough, spooking shareholders, who then turn down Musk.
We haven’t talked at all about a different series of events in which Musk gets to buy Twitter in 2022, but then some swirl of all these things—a financial downturn, margin calls, Tesla underperformance, the general headache of running Twitter as its needs to cut costs and add new revenue streams—leads to another Act of Elon. In that, he sells a much-reduced Twitter to someone interested in it because of its town-square function or maybe he converts a much-smaller Twitter into a nonprofit that he does or does not control himself. Cofounder Jack Dorsey has voiced confidence in Musk, and in the same breath said he think the $5.1 billion (sales) business he ran twice shouldn’t be a for-profit business.
If you go back and count the “ifs,” “maybes” and “buts” in the preceding paragraphs, you get a sense that, yeah, Musk is still pretty likely to walk away with Twitter. Nonetheless, you’ll have a better idea why investors are treating this deal extra cautiously, three to four times more cautiously than they otherwise might. At some later point, we can regroup and decide whether Musk’s Twitter purchase belongs on the “great things” list or on the one with less noble things, next to the pretend takeover and the penis jokes.