Musk’s Twitter Deal Is No Sure Thing

Musk's Twitter Deal Is No Sure Thing

This looks like a hole you could drive a Cybertruck through, but Wall Street is rightfully wary.

Elon Musk‘s

agreement to buy

Twitter

TWTR -1.78%

for $54.20 a share is leaving a lot of money on the table for anyone willing to ride his coattails. The social-media company’s shares are currently about 12% below the agreed-upon price. Assuming the deal closes in late October, the annualized return of owning the shares between now and then comes to about 26%. That is the sort of merger arbitration spread one typically sees when there are serious antitrust concerns or if an uncertain shareholder vote will determine a deal’s fate.

None of those apply here, and the deal is for a fixed amount of cash, not shares. Additionally, Mr. Musk is a US citizen, making a review on national security grounds unlikely. Before trying their luck, though, amateur arbitrators should both consider with whom they are dealing and read the fine print.

The merger agreement contains a reverse termination fee of $1 billion should Mr. Musk fail to consume the deal. Such penalties are hardly get-out-of-jail-free cards, especially since a buyer can’t just walk away for no reason. In this case, though, he effectively can: Buried at the end of the agreement is the language about Twitter’s legal remedies. Incredibly, the potential damages are capped at the level of the reverse termination fee.

As a veteran special situations hedge-fund manager points out, $1 billion isn’t an awful lot at just 2.5% of Twitter’s value. rival social media company

Meta Platforms

‘shares are down by 41% so far this year,

Snap Inc.

is down by more than half and the tech-heavy Nasdaq Composite Index is off by 25%. During a time of risk aversion in markets such as today, the market might leave a wide merger arbitrage spread even if the buyer’s name was Blackstone, explains the manager.

And this buyer’s name is Musk. The world’s richest person on paper has been known to change his mind before, or worse. He mused about taking

You’re here

private, even going so far as to proclaim “funding secured” to his Twitter followers, resulting in securities fraud charges and a penalty. He also once promised to set up a challenger to Warren Buffett’s See’s Candies, only to back down after failing to find something he felt was superior.

And while $1 billion is a lot of money, even for the world’s richest man, it is his money. There isn’t so much as a pushover board to argue with him. If one assumes that at least half of 1% of Mr. Musk’s estimated $240 billion net worth is tied to his irreverent image, then that exceeds the potential damages. Thumbing his nose at Wall Street is part of his identity, including crudely mocking the Securities and Exchange Commission.

Mr. Musk also could realize that “fixing” Twitter will be hard. Issues around content management are complex and weighty, and it already seems to be dawning on him, based on his public remarks, that the issue is more complicated than just a simple call for more free speech.

Offsetting those risks is the fact that Twitter seems to have become a bit of a hero’s quest, both for Mr. Musk and many of his 92 million followers on the platform. That following has given multibillionaire businessman the pull of a major celebrity—something he clearly values. And note that his decision to buy Twitter came just weeks after he publicly claimed to be giving “serious thought” to building his own social media platform—a tall task for even a popular figure with a wide following.

The question isn’t merely “will he or won’t he,” though. There also is the risk that Mr. Musk tries to strike a better deal. That thesis was put forward this week by Hindenburg Research, an activist short seller betting that Twitter shares will fall. Mr Musk responded to the suggestion on—where else—Twitter with what wasn’t quite a rebuttal: “Interesting. Don’t forget to look on the bright side of life sometimes!”

Merger arbitration professionals, who often borrow heavily to earn money on deal spreads, wouldn’t be feeling cheerful at all if a sure payday were sabotaged by the world’s quirkiest billionaire. For better or worse, this opportunity is for the amateurs.

Elon Musk has cultivated close ties with Beijing to build Tesla’s business in China. Now that he is buying Twitter and focusing on free speech, WSJ looks at how China has used the social-media platform to promote its views, and why that’s raising concerns. Photo Illustration: Sharon Shi

Write to Spencer Jakab at spencer.jakab@wsj.com and Dan Gallagher at dan.gallagher@wsj.com

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