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Saturday, June 25, 2022

Twitter’s Board approves Musk’s $44 billion acquisition

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Yesterday we told you that Elon Musk is demanding that Twitter take care of three things before he moves forward with his acquisition of the company. He wants to know how many fake accounts created by bots contain illegitimate Twitter subscribers. The company says that the number of fake users is less than 5% of the total which is a figure heavily rejected by the richest man in the world as being false.

Musk is reportedly unhappy with the structure of his deal to buy Twitter

Musk also is said to be unhappy with the structure of the deal which reportedly includes highly leveraged margin loans that allow him to borrow up to 50% of the value of his Tesla shares. This is a very risky play on Musk’s part because if Tesla stock were to drop in value to the point where the shares being used as collateral for a loan fall below a certain level, Musk would be forced to deposit additional cash in his account or face having his Twitter holdings sold unilaterally.

The third thing that Musk wants to know is whether he has the backing of Twitter shareholders. Not everyone loves him and he has played games before with Tesla stockholders. In August 2018, the multi-billionaire (with a net worth estimated at $213.9 billion), released a tweet to his 22 million Twitter followers saying that he could take Tesla private at $240 a share, a huge premium to Tesla’s shares at the time.

Musk’s tweet helped sent the shares up by over 6% even though no terms of a deal were discussed with any major financing partners. The SEC’s complaint, filed in federal district court in the Southern District of New York, alleged that Musk violated anti-fraud provisions of the federal securities laws.
According to CBS News, Twitter’s board today voted to approve the $44 billion merger. Still, on the corner of Wall Street and Main Street, the pricing of Twitter’s shares remains well below the $54.20 per share that Musk initially said that he would pay. At the close today, Twitter stock closed at $38.91 for a gain of just under 3% for the day.
In an interview with Bloomberg last month, Musk said that he will cut the salaried workforce at Tesla by 10% over the next three months. He also said that his goal to slash jobs at the electric carmaker has come about because of a “super bad feeling” he has about the U.S. economy. Talking about the possibility of a U.S. recession, the CEO said, “It is not a certainty, but it appears more likely than not.”

Musk could take a financial hit if he is called to put up more money to meet a margin call

Musk’s fear of receiving a margin call is a legitimate concern. After all, Tesla’s stock has declined by one-third since early April when Musk first disclosed his plans to purchase Twitter. The sell-off in the shares came as investors feared that Elon would be selling some of his 175 million shares of Tesla stock to help finance the deal. The latest reported data show Twitter with 330 million monthly active users and 166 million daily active users (mDAU).

To reduce the risk of receiving a margin call, Elon Musk will need to make a change to how the deal is currently financed. This could be done by reducing the value of the deal. The quickest way this could be accomplished would be for Elon to announce that he was walking away from the deal. Short-seller Hindenburg Research said last month, “If Elon Musk’s bid for Twitter disappeared tomorrow, Twitter’s equity would fall by 50% from current levels. Consequently, we see a significant risk that the deal gets repriced lower.”

A short-seller is a trader who profits from a falling stock by borrowing the shares and then sells them hoping to buy back the stock at a lower price. Now that Twitter’s board of directors has approved the deal, it has sent the SEC a letter recommending to Twitter stockholders that they vote (for) “the adoption of the merger agreement.” If the deal were to close now, investors in Twitter would collect a profit of $15.22 for each share they own.





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