New twists and turns, as Elon Musk raises issues about Twitter earlier than the deal is full.

Toronto, Canada:

Has Elon Musk developed chilly ft? Is he experiencing purchaser’s regret? Or is he making an attempt to create drama for the markets, true to his public persona? Or may Musk be negotiating for a greater value?

Musk started buying Twitter stock in January. On March 14, he introduced a 9.2 per cent stake within the firm. On April 5, Twitter CEO Parag Agrawal introduced that Musk would be part of Twitter’s board of administrators, and referred to as it a “welcome” transfer that may make Twitter “stronger in the long-term.” On April 10, Agrawal introduced that Musk decided against joining the board.

On April 14, Musk introduced an offer to pay US$54.20 per share to buy the entire stock of the company. In response, on April 15, Twitter introduced a Shareholder Rights Plan, a poison capsule to discourage Musk from buying the corporate.

On April 21, Musk introduced an in depth plan to finance the US$44 billion deal. Importantly, Musk would pay US$21 billion of his personal funds that may largely come from the sale of his Tesla inventory holdings, and he would additional borrow US$13 billion in opposition to his Tesla holdings. Having seen a concrete financing plan, Twitter’s board accepted Musk’s offer on April 25.

Happily ever after?

It ought to have been fortunately ever after for Twitter and Musk, however on May 17, Musk expressed concerns that 20 per cent of Twitter accounts are fake, that his supply was primarily based on Twitter’s subscriber rely being correct, and that he wouldn’t proceed with deal until there was proof that fewer than 5 per cent of accounts are pretend.

Musk’s menace made no sense, as a result of his supply was by no means concerning the variety of subscribers or concerning the economics of the deal. After all, Twitter’s revenues, cash flows, dividends or profits cannot justify a US$44 billion valuation.

Besides, Musk by no means made his calculations primarily based on value per subscriber multiplied by Twitter’s subscriber rely. His transfer was primarily about what he needed to make of Twitter. Or it might have been an arrogance buy: buying a modern-day newspaper, like many wealthy individuals do (Jeff Bezos owns the Washington Post and Rupert Murdoch owns the Wall Street Journal).

If Musk actually believed that many Twitter accounts are pretend, why did he tweet so typically? Musk made so many essential bulletins on Twitter, together with his notorious tweet about taking Tesla private.

Ripple results

So, what occurred since his earlier bulletins? In my opinion, two components modified Musk’s thoughts. First, a meltdown in technology stocks, notably media shares, meant that Twitter as a standalone firm was not as invaluable because it was in early January.

Second, Tesla’s shareholders were shaken by Musk’s strikes. They turned fearful that Musk would spend his time altering Twitter, as a substitute of paying undivided consideration to championing electrical automobiles. They should even be fearful about their extremely indebted CEO, who now plans to sell or pledge Tesla’s shares to indulge his personal whims. Tesla’s inventory fell from US$1,091 on April 5, when Twitter introduced Musk’s becoming a member of the board of administrators, to US$728 on May 17, simply earlier than Musk questioned Twitter’s subscriber rely.

This value drop quantities to a US$380 billion loss. Musk owns about 175 million shares in Tesla, which signifies that he personally suffered a US$64 billion loss, far exceeding the US$44 billion he deliberate to pay for Twitter.

Musk is a shrewd businessman and a wise negotiator — one would not change into the world’s richest person by just smoking weed. He now seemingly realizes that going after Twitter will not be value it and he has extra to lose than achieve from this deal.

Cutting losses

In my opinion, he has now began laying the groundwork to drag out from the deal.

It will not be simple to easily stroll away from a signed deal. While the preliminary merger agreement supplies for the opportunity of a breakup, it will probably occur solely below specified circumstances. In this example, Musk should pay US$1 billion as a termination charge.

In addition, Twitter could “specifically enforce the obligations under the merger agreement,” which means that Twitter can implement the settlement. Indeed, the Twitter board of administrators not too long ago indicated that it intends to pursue this option, together with with court docket motion.

Where can we go from right here? Twitter inventory is buying and selling at a 30 per cent low cost to Musk’s supply value, which signifies that buyers severely doubt the deal would undergo. A protracted authorized battle is on the playing cards. The U.S. Securities and Exchange Commission would change into much more cautious in future offers with Musk.

Musk has already suffered monetary losses, and his fame has taken successful. He mocked executives at Twitter with a wave of abusive tweets.

This is a large fall from grace for Musk, who in 2021 was named TIME Magazine‘s person of the year.

As far as Twitter is worried, my recommendation could be to gather the US$1 billion termination charge from Musk and transfer on. By pursuing a protracted authorized battle, Twitter would lose workers and subscribers.

Let Musk give attention to what he does greatest, that’s, to innovate with new applied sciences. And let Twitter give attention to what it does greatest, to create a digital city sq. for world information and public opinion.

(Author: Anup Srivastava, Canada Research Chair and Associate Professor, Business, University of Calgary)

Disclosure assertion: Anup Srivastava doesn’t work for, seek the advice of, personal shares in or obtain funding from any firm or organisation that may profit from this text, and has disclosed no related affiliations past their educational appointment.

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