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Stock Analyst Update

Musk Tweets Doubts About Twitter Deal

The Tesla CEO later tweeted that he remains 'committed' to purchasing the firm.

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Elon Musk tweeted early on May 13 that his plan to acquire Twitter (TWTR) is “on hold” until Twitter’s claim that spam accounts represent less than 5% of its total users is supported by evidence. Approximately three hours later, the Tesla CEO tweeted that he remains “committed” to purchasing the firm. In our view, Musk will have difficulties exiting the deal even if Twitter cannot support its claim about the proportion of spam users. The firm’s statement regarding the risk of miscalculating spam users has consistently been in the risk factors section of its annual and quarterly SEC filings, which any buyer should be aware of. In our view, Musk cannot claim that this news was surprising.

If Musk decides to abandon this deal, he is likely to face lengthy legal battles with the firm and its shareholders, which could add significant costs to the $1 billion breakup fee for which he will be responsible. In addition, the market’s reaction could rid Musk of a large amount of his unrealized profit made on investing in Twitter in the low to mid-$30s. Musk may also get into legal fights with holders of Tesla, who have seen their shares decline 25% since the April 20 filing in which it was revealed that possible financing of the Twitter deal included a margin loan against his Tesla shares. Since then, there have been reports that Musk is trying to raise equity and preferred financing to avoid the margin loan. Twitter stock was down as much as 11% on May 13.

On the bright side, the stock’s reaction may have created an opportunity for institutional investors to get into the name or increase their stake as Musk’s action has created merger arbitrage opportunities with significant upside—but also with a lot of risk. We are maintaining our $54.20 fair value estimate, which is the price at which Musk committed to acquire Twitter.

Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.