Elon Musk must pay $1 billion to Twitter if he withdraws this purchase option, but the final price may go down.
The acquisition of Twitter by Elon Musk is not assured, and this puts Wall Street on edge.
Shares of the social network have been trending lower since the announcement , and this could spark an unusual move in the acquisition. Elon Musk has everything to reduce the final price of Twitter.
A Hindenburg Research publication evaluates the elements surrounding this merger between two companies created by Elon Musk and Twitter, and determines that there is a key risk in this process: a withdrawal of purchase intent.
“As a result of these developments we believe that if the Elon Musk offer were to disappear tomorrow, Twitter’s equity would drop by 50% from current levels. Consequently, we see a significant risk that the price of the operation will be lower, ”they pointed out as part of the analysis.
This would be mainly due to three factors that undermine Twitter’s dominant position in the negotiation: one, the collapse of Twitter’s value in the NASQAD composite, a price calculated by adding the value of more than 5,000 companies and which, currently, is one of the most trusted stock market indices in the United States.
At that valuation, Twitter plummets 17.6% since Musk’s first announcement by buying 9.2% of the company’s shares. Today, Twitter shares show a downward trend since April 25, the day the offer was accepted and the first merger agreement with X Holding I and II was signed, from 51.70 to 48, $13 this Monday.
The poor results of Twitter
A large part of Twitter’s problems in maintaining a dominant position in this negotiation is the weak result obtained in Q1 2022, three days after announcing the agreement with Musk.
In that report, the social network not only reported a reduction in revenue, but also an exaggerated increase in active users of 1.9 million profiles. That inaccuracy is nothing new in results reporting on Twitter, which is often infested with bots.
A billion dollars for not buying
In this case, the agreement between both parties establishes a penalty of one billion dollars before the withdrawal of the proposal in the case of Musk, or accepting a different proposal in the case of Twitter.
However, the analyst points out that Musk has already announced that he will withdraw the capital used in the acquisition of 9.2% of shares if the agreement is not achieved in favor of the businessman, an amount valued at 2.89 billion dollars based on the Closing on the day of the announcement.
This amount far exceeds the penalty that Musk must pay if he withdraws the offer , but a price that could cause a further schism in Twitter and that would further weaken the retention of investors in the event of an eventual withdrawal from the agreement.
The only lock that Twitter has on Musk is the “specific performance” clause within the merger agreement with X Holding I and II, with which the social network could force Musk to close the deal as long as it has the financing available. Until now, the businessman seeks to finance the acquisition.
“According to investment bank Cowen, the current deal for Twitter provides for a capital commitment of $20.1 billion from Musk and $7.1 billion from other investors, while the remaining $19.25 billion will be financed through debt,” the report highlights.
Peace of mind for Tesla
The other scenario that could encourage this strategic withdrawal is the impact of this action on Tesla, one of Musk’s “small cash” in this capital leverage. This monetary proposal has caused Elon Musk to convert millions of Tesla shares into capital, a move that negatively impacted the value of the firm.
If Musk withdraws the offer, he can refocus on Tesla after acquiring Twitter for a smaller amount.
In short, it would be more profitable for Elon Musk to withdraw the offer by paying a penalty of one billion dollars, reverse the agreement for the acquisition of 9.2% of shares and, with that, wait for the capitalization of the company to continue with that clear downward trend to propose a lower price than the one agreed upon for 44 billion dollars.
“To date, we believe that Twitter has fallen short in managing the admittedly difficult balance between user safety and being an open and trusted forum for diverse ideas,” Hindenburg’s report mentions. “Overall, we support Musk’s efforts to take Twitter private and see a significant chance the deal will close at a lower price.”