Before the U.S. stock market opened on Friday, May 13, Musk’s “deal suspension” tweet caused a thousand waves, prompting Twitter CEO Parag Agrawal to send several tweets saying “expect the deal with Musk to Well done, but also fully prepared for the future.”
Since taking a stake in Twitter on April 4, Musk has shown his determination to make acquisitions. Even though Twitter once refused to be acquired and launched a “poison pill” plan, Musk still hopes to impress Twitter’s board of directors through his strong financing capabilities. After pressure from the company’s shareholders, Twitter’s board finally agreed to Musk’s $44 billion offer.
Dan Ives, an analyst at U.S. brokerage Wedbush, said earlier:
Musk’s announcement that the Twitter deal was on hold was like a “circus show” that could eventually turn into a “horror show.” That could lead to three potential outcomes: the deal falls through; Musk cuts the purchase price; Musk walks out of the deal and pays a $1 billion breakup fee.
But in fact, if Musk does choose to abandon the acquisition of Twitter, he will not only face a simple $1 billion breakup fee, but also a breach of contract lawsuit from Twitter, which may cost him billions of dollars.
The $1 billion breakup fee is a certainty
In late April, an SEC filing revealed that, under certain circumstances, Musk could be required to pay Twitter a $1 billion termination fee. For example, if Musk can’t secure enough debt financing to complete the $44 billion acquisition of Twitter.
As noted above, if the obligations of the parent company (the special company Musk created for the acquisition) and the acquiring subsidiary to complete the merger are satisfied and the parent company fails to complete the merger as required by the merger agreement, including due to equity, debt and/or security deposits The loan facility was not funded, and the company will be required to pay Twitter a $1 billion termination fee.
The documents also show that Twitter will pay Musk a $1 billion breakup fee if it finds a competing offer or shareholders reject the deal.
Don’t forget there are lawsuits for breach of contract
In addition to the $1 billion breakup fee, Musk is at risk of being sued by Twitter Inc for breach of contract, which could cost the billionaire billions of dollars.
A sell-off like the one that currently costs Twitter more than $9 billion in market value would not be a valid reason for Musk to walk away, with or without a breakup fee, according to a senior M&A lawyer familiar with the matter.
Twitter could sue him for billions of dollars in addition to charging $1 billion if Musk walked away from bidding simply because he felt he was paying too much. This has happened before, like in 2020, when Tiffany sued French luxury goods group LVMH for trying to pull out of an agreed deal. That lawsuit was settled when Tiffany agreed to reduce its sale price from $16.2 billion to about $15.8 billion.
In 2019, LVMH announced that it would acquire Tiffany; in September 2020, due to the huge impact of the epidemic, LVMH once decided to stop the acquisition of Tiffany; but Tiffany has filed a lawsuit to enforce the The acquisition agreement, alleging that LVMH Group deliberately delayed the transaction, LVMH counterclaimed that Tiffany mismanaged during the epidemic crisis. The following month, the two sides reached a new agreement, the purchase price from $ 135 per share to $ 131.5.
Also in court with the acquirer is the medical technology company Channel MedSystems, which sued Boston Scientific in an attempt to walk away from a $275 million deal. In 2019, a judge ruled that the deal should be completed, and Boston Scientific paid Channel MedSystems an undisclosed amount of a settlement.
Acquirers seeking to exit a deal sometimes use the “material adverse effect” clause in the merger agreement, arguing that the target has been severely harmed. But like many recent mergers and acquisitions, the wording in the Twitter deal doesn’t allow Musk to pull out because of deteriorating business conditions, such as declining ad demand, or because Twitter’s stock price has plummeted. Musk also waived his due diligence rights when negotiating a takeover of Twitter in order to push the latter to accept his “best and final” offer possible, making it harder for him to argue in court Twitter misled him.
What does Musk want to renegotiate?
The day after Twitter’s board announced it agreed to sell the company to Musk for $44 billion, Tesla lost $100 billion in market value; Twitter later admitted three years after its weaker-than-expected first-quarter earnings report Since then, the number of users has been exaggerated due to “mistakes”; recently, Musk has been making frequent moves to raise funds. Wall Street news mentioned that after finding a new “gold master dad” last week to add $7.1 billion, sources said that Musk has begun to seek up to $6 billion in preferred stock financing.
So, does Musk, who once vowed and determined to win, really want to withdraw from this acquisition under the excuse of “the problem of junk accounts”? Foreign media reported that Musk may want to try to renegotiate and complete the acquisition at a lower price.
An earlier Wall Street News article mentioned that the bearish firm Hindenburg Research had previously speculated that Musk may try to restart negotiations before the deal is completed to drive down the transaction price.
Bernstein senior research analyst Toni Sacconaghi explained:
This may be a negotiating tactic on behalf of Musk, the market (Twitter market cap) has dropped a lot, and he may be using the guise of real active users as a negotiating tactic.
While Musk has said he didn’t buy Twitter to make money, many investors believe Tesla’s stock has fallen 27% since revealing his stake in Twitter, in part because of concerns that he may have to sell more shares. Therefore, if Musk can negotiate a lower price for Twitter, Tesla stock will be under less pressure. If co-investors start to worry about overbidding, they may pressure him to renegotiate.
Notably, Musk’s Tesla has fallen about 24% over the past month, hit by the Twitter acquisition. If Musk thinks the Tesla losses are related to his Twitter acquisition, and the amount is so large that it could exceed the $1 billion breakup fee and other losses he could be charged with in court, then he may decide it makes sense to end the acquisition. But he also has to face the reputational damage associated with deal-breaking.
