Twitter Plunges After Musk Pumps Brakes on Deal
Shares were trading at a discount to Elon Musk's offer amid skepticism the deal would succeed, and fell Friday morning after he put the deal "temporarily on hold."
Twitter (TWTR) is set to dive at the U.S. open, with premarket indicators pointing to a 15% drop in price for the company, which would push its shares below the $39 they were at just before Elon Musk disclosed his initial 9% stake at the beginning of April.
The world's richest man placed the $44 billion deal on hold citing doubts about the number of spammers and bots on Twitter. He later added that he is still committed to the deal.
"Musk’s announcement is the latest upset in a highly volatile merger story that’s rife with risks for investors," Morningstar’s Chief U.S. Market Strategist Dave Sekera says. "One Twitter post can instigate a wave of selling pressure."
Musk's move isn't a surprise to everyone. Throughout the biggest takeover saga of 2022, the social-media company never got close to Musk's $54.20 per share offer, reaching their narrowest discount of 5% at the end of April. By Thursday's close, that had widened to 20%. By contrast, similar deals since 2005 had spreads of 2% to 4% a month after being announced, according to PitchBook, a Morningstar company.
There are also concerns that Musk may be paying too much for the company as Twitter's peers in the tech sector have been caught in a tailspin. Adding to the uncertainty is that Musk's motivation to buy Twitter isn't entirely economical, so this deal won't necessarily follow the same patterns as typical buyouts, Sekera says.
Meanwhile, Twitter's peers in the tech sector have been caught in a tailspin, raising concerns that Musk may be overspending.
High-profile skeptics of the deal included short seller Hindenburg. Disclosing a short position in the stock, Hindenburg cited a high risk that Musk will pay the $1 billion breakup fee or reprice the entire deal at a much lower level.
Its founder Nate Anderson couldn't hold back his glee at Friday's news. Anderson's indictment of Musk's plans had included weak quarterlies and yet another admission that user numbers had been overstated.
"As indicated by Musk, the platform is flooded with bots, spam, and scam accounts that likely inflate its genuine user metrics even further," Hindenburg wrote four days before Musk put his takeover on hold.
The short seller sees serious downside for Twitter's stock if Musk walks away. Selling pressure from Musk's promised stake sale if no takeover takes place, the wider Nasdaq's 17% slump since talks started, and Twitter's weak results mean that if the deal fails shares could fall by as much as 50% in downside to Twitter stock, Hindenburg wrote in its letter.
Musk's deal isn't off the table, but the road ahead is marked by uncertainty. Trading on the likelihood of a successful outcome, or merger arbitrage, is fraught with downside risk and only a few percent of upside potential, Morningstar's Sekera says.
"There's good reason for most people to leave this strategy to the professionals," Sekera wrote.
There may be a winner in Friday's setback to the Twitter takeover: Tesla. There is concern that Musk is stretching himself too thin between his pursuit of an automotive revolution, a Mars colony, cyborgs, and one of the world's most important social networks. Tesla shares, down 36% since Musk disclosed his Twitter stake, were up 4.55% in early trading on Friday.
"There's definitely some positive sentiment around Tesla, as some shareholders will breathe a sigh of relief after worrying that Musk may dedicate too much time managing Twitter instead," Sekera says.
Lukas Strobl does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.