Elon Musk could not sidestep its deal to acquire Twitter by paying the agreed-upon $1 billion parting fee. It’s not that simple.
Musk tweeted Friday that he’s decided put his Twitter acquisition “on hold” when he researched to see if the number of fake/spam accounts on Twitter is really just 5%, as the company has long claimed.
He followed up with that tweet with a reiteration that he remained committed to the acquisition.
But he risks being sued from Twitter because breach of contract can cost the richest person in the world billions of dollars.
More than a parting fee
Musk and Twitter have agreed to a so-called reverse termination fee of $1 billion when the two sides reached an agreement last month. However, the breakup fee is not an optional payment that allows Musk to bail without consequences.
A reverse break-up fee paid from a buyer for a target applies when there is an external reason the transaction cannot be closed, such as a regulatory intermediary or third-party financial concerns. father. Buyers can also ignore if there is fraud, assuming the discovery of incorrect information could cause so-called “serious side effects”. A market drop, like the current sell-off has caused Twitter lost more than 9 billion USD in market capitalizationwould not be considered a valid reason for Musk to cut — the breakup fee or no breakup fee — according to a senior M&A attorney familiar with the matter.
Musk and investors might want a better deal
Musk’s reasons for keeping the deal may be similar: He might want Twitter to lower its selling price. Twitter shares fell more than 8% on Friday and are down about 23% from Musk’s agreed-upon purchase price of $54.20 per share. Part of the decline has to do with the overall drop in tech stocks this month. Nasdaq has dropped another 11% since the market close on April 25, the day Twitter accepted Musk’s offer.
“This is probably a negotiating tactic on behalf of Elon,” Toni Sacconaghi, a senior research analyst at Bernstein, said on Friday. CNBC’s “Squawk Box”. “” The market went down a lot. He may be using the guise of real active users as a bargaining ploy. “
Musk may feel some pressure or obligation on other potential investors on Twitter to lower prices, even if the world’s richest person is more price-agnostic.
Musk negotiating with outside investors for both equity and preferred financing to reduce his personal stake in Twitter. If he can get a lower price for the social media company, the profit may be higher for outside investors if and when Twitter goes public ownership or resold.
Why can he still try to get bail
Although he says he remains committed to buying Twitter, Musk may be tempted to throw in the towel given the losses he has suffered on paperwork related to Tesla equity ownership. Shares of Tesla are down about 24% month-over-month.
If Musk believes his Tesla loss is related to his Twitter acquisition and is substantial enough to potentially outweigh both the $1 billion termination fee and any additional damages which he will have to pay in court if he loses, he may decide it’s reasonable to walk away.
But he will also face reputational damage related to breaking a deal. It’s unclear if any future companies would risk selling to Musk with that track record.
Musk was not available for comment immediately.
Twitter may need to renegotiate
Just as Tiffany and LVMH finally settled, Twitter may not have many good options but to renegotiate with Musk. The company may want to avoid a lengthy and costly lawsuit. Employees may run away because the company does not have a clear future plan. Twitter has cut costs. On Thursday, it fired two executives and said it was suspending hiring.
When Twitter agreed to sell itself to Musk for $54.20, the board didn’t mind pushing the price higher partly because there are no other interested buyers with that price. Twitter’s board has concluded that it is unlikely to return to trading at higher levels any time soon due to a decline in valuations this year in peer-to-peer stocks like Facebook and Snap.
Twitter’s best outcome might just be accepting a lower offer from Musk.
A Twitter spokesperson was not immediately available for comment.
WATCH: Elon Musk says he’s “remaining committed” to acquiring Twitter
