Elon Musk can’t just walk away from his Twitter acquisition by paying an agreed fee of $ 1 billion. It’s not that simple.
On Friday, Musk tweeted that he decided to postpone the acquisition of Twitter when he investigates whether the number of fake / spam Twitter accounts is actually only 5%, as the company has long claimed.
He followed this tweet in which another reiterated that he was still committed to the acquisition.
But he risks suing Twitter for breach of contract, which could cost the world’s richest man billions of dollars.
More than the gap fee
Musk and Twitter have agreed to a so-called $ 1 billion reverse shutdown fee when the parties reached an agreement last month. However, the breakout fee is not a payment option that allows the Mask to be pledged without consequences.
A payback for the gap paid from the buyer to the target is applied if there is an external reason why the transaction cannot be closed, such as regulatory mediation or third-party financing problems. The buyer can also walk if there is fraud, provided that the detection of incorrect information has a so-called “significant adverse effect”. The fall in the market, similar to the current sell-off, which led to Twitter losing more than $ 9 billion in market capitalization, will not be considered a good reason to cut Mask – a gap fee or no gap fee – according to a senior M&A lawyer familiar with this case.
Musk and investors may want a better deal
Mask’s suspension arguments may be similar: he may want Twitter to lower the sale price. Shares of Twitter fell more than 8% on Friday and fell about 23% from Mask’s agreed price of $ 54.20 per share. Part of the decline is due to the overall decline in technology stocks this month. Nasdaq fell another 11% after the market closed on April 25, the day Twitter accepted Mask’s offer.
“This is probably a tactic of negotiating on behalf of Elon,” Tony Sakonagi, Bernstein’s senior analyst, told CNBC’s Squawk Box on Friday. “The market has fallen sharply. He probably uses the view of real active users as a walker for negotiations. “
Musk may feel some pressure or obligation to other potential investors on Twitter to lower the price, even if the richest person in the world is no longer dependent on prices.
Musk is in talks with outside investors about both stocks and overwhelming funding to reduce his personal stake in Twitter. If it can get a lower price for a social media company, profits may be higher for outside investors if and when Twitter returns to state ownership or is resold.
Why else could he try to get bail
Although he said he is still committed to buying Twitter, Musk may be tempted to throw in the towel, given the losses he bears on paper regarding his ownership of Tesla shares. Tesla shares have fallen about 24% over the past month.
If Musk believes his Tesla losses are related to his acquisition on Twitter and significant enough to potentially outweigh both the $ 1 billion shutdown fee and any additional damages he will be charged in court if he loses, he may decide that leaving makes sense.
But he will also have to deal with damage to his reputation due to breach of deal. It is unclear that any future company will risk selling Mask with such a track record.
Musk was not immediately available for comment.
Twitter may need to be persuaded
Just as Tiffany and LVMH eventually agreed, Twitter may not have many good options other than negotiating with Mask. The company would probably like to avoid an expensive lengthy lawsuit. Employees may run away because the company will not have a clear plan for the future. Twitter is already cutting costs. On Thursday, he fired two executives and said he was postponing hiring.
When Twitter agreed to sell itself to Mask for $ 54.20, the board didn’t insist on a higher price in part because there were no other interested buyers at that price. The Twitter board concluded that it is unlikely to return to trading at higher levels soon, given this year’s decline in the valuation of shares of counterparts such as Facebook and Snap.
The best result for Twitter may be to simply accept a lower offer from Mask.
A Twitter spokesman was not immediately available for comment.
WATCH: Elon Musk says he is “still committed” to acquiring Twitter