Explainer: Can Elon Musk renegotiate a lower price for his Twitter deal?

Explainer: Can Elon Musk renegotiate a lower price for his Twitter deal?

Explainer: Can Elon Musk renegotiate a lower price for his Twitter deal?

May 11 (Reuters) – Shares of Twitter Inc (TWTR.N) plunged to their lowest level since the social media company agreed to sell itself to Elon Musk for $44 billion on April 25, raising whether the richest person in the world will try to renegotiate the deal.

On Tuesday, the implied probability of the deal closing at the agreed price fell below 50% for the first time, when Twitter shares fell below $46.75. That’s halfway between the deal price and the stock price before Musk revealed he took a stake in the social media company on April 4.

Shares closed at $47.26, giving the company a market value of $36 billion.

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News that Musk would lift the ban on former President Donald Trump’s Twitter account, while politically significant, did not move stocks. Read more

Shares of Twitter plunged with the broader slump in tech stocks, as investors worried about inflation and a possible economic slowdown. Some investors, such as short seller Hindenburg Research, speculated that Musk would try to negotiate a lower selling price before the close. Read more

Musk has not indicated that he plans to reopen negotiations and his representatives declined to comment on the matter.

Here are the answers to some key questions.

WHY WOULD MUSK RENEGOTIATE THE DEAL?

Musk has an estimated net worth of nearly $240 billion according to Forbes, but most of his wealth is tied to shares of Tesla Inc (TSLA.O), the electric car maker he runs.

Musk has already decided to raise funds to finance the acquisition of Twitter. He sold $8.5 billion worth of Tesla stock and took out a $12.5 billion margin loan secured by his Tesla stock. Last week, he reduced that margin loan to $6.25 billion after bringing in co-investors. Musk said in a regulatory filing that he may seek more funding for the deal. Read more

While Musk has said he doesn’t care about the economics of buying Twitter, some investors believe the 27% drop in Tesla shares since revealing his stake is driven in part by fears he might have to sell more shares. Consequently, Tesla shares would be under less pressure if Musk could negotiate a lower acquisition price. Some co-investors may encourage it if they fear paying too much.

HOW COULD MUSK NEGOTIATE A LOWER PRICE?

Musk may threaten to pull out of the deal unless Twitter’s board agrees to reopen negotiations. He’s contractually obligated to pay a $1 billion severance fee, but Twitter would have to sue for more than that in damages or try to force Musk into the deal.

There are many precedents for a renegotiation. Several companies revised the prices of agreed acquisitions when the COVID-19 pandemic broke out in 2020 and caused a global economic shock.

In one case, French retailer LVMH (LVMH.PA) threatened to walk away from a deal with Tiffany & Co. The US jewelry retailer agreed to drop the acquisition price from $425 million to $15.8 billion. dollars.

Simon Property Group Inc (SPG.N), the largest operator of shopping centers in the United States, managed to reduce the purchase price of a majority stake in rival Taubman Centers Inc by 18%, to 2.65 billions of dollars.

ARE THERE ANY RISKS IN TRYING TO RENEGOTIATE?

There’s no certainty the strategy will work, and it could end up costing Musk more money.

First, Musk would have to convince Twitter that he would really walk away. Then there are legal hurdles, including a “specific performance” clause the social media company can cite for a judge to force Musk into the deal.

Acquirers who lose such a case are almost never obligated to complete an acquisition, but the target companies can seek monetary relief for the price of the abandoned deal.

Companies that have fought acquirers in court include medical technology company Channel Medsystems Inc, which sued Boston Scientific Corp (BSX.N) for trying to pull out of their $275 million deal. In 2019, a judge ruled the deal should go through, and Boston Scientific paid Channel Medsystems an undisclosed settlement.

Acquirers looking for a way out sometimes turn to “material adverse effect” clauses in their merger agreement, arguing that the target company has been significantly damaged. But the language of the Twitter deal, as in many recent mergers, does not allow Musk to walk away because of a deteriorating business environment, such as a drop in demand for advertising or because shares of Twitter took a dive.

Musk also waived his right to do due diligence when he brokered the Twitter deal, trying to get the company to accept his “best and last” offer. This makes it harder for him to argue in court that Twitter misled him.

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Reporting by Greg Roumeliotis in New York; Editing by David Gregorio

Our standards: The Thomson Reuters Trust Principles.

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