Mask’s plans to buy Twitter have worried policymakers around the world.
Joe Skipper | Reuters
Elon Musk can’t back down from his contract to acquire Twitter by paying a $ 1 billion breakup fee. It’s not that cheap.
Musk tweeted on Friday that he had decided to “hold” his acquisition on Twitter because he was researching whether the amount of fake / spam accounts on Twitter was actually only 5%, as the company has long claimed.
He followed that tweet and reiterated that he was still committed to the acquisition.
But he risked a lawsuit from Twitter for breach of contract that could cost the world’s richest man billions of dollars.
Breakup fees are high
Musk and Twitter agreed on a so-called reverse termination fee of 1 billion when the two parties reached an agreement last month. However, the breakup fee is not an alternative payment that allows the mask to be bailed out without consequences.
A reverse breakup fee paid to a target from a buyer is applicable when an agreement cannot be terminated due to an external reason, such as regulatory intermediation or third-party financing concerns. Assuming that the discovery of false information has a so-called “adverse effect on the object”, a buyer may even walk away if there is fraud. A market drop like the current sell-off, which has caused Twitter to lose more than $ 9 billion in market cap, would not be considered a valid reason for the mask to relax – no breakup fees or any breakup fees – according to a senior M&A lawyer familiar with the matter.
The lawyer said that if Musk abandoned only one bid because he felt he had paid extra, Twitter could claim $ 1 billion in fees as well as sue him for billions of dollars in damages. This has happened before, as in 2020 Tiffany filed a lawsuit against French luxury goods suite LVMH in an attempt to withdraw from its agreed agreement. The lawsuit was settled out of court, with Tiffany agreeing to reduce her sales from $ 16.2 billion to about .8 15.8 billion.
Musk and investors can ask for a better deal
Mask’s argument for holding a transaction may be similar: he may ask Twitter to reduce its selling price. Shares of Twitter fell more than 8% on Friday, and Mask fell nearly 23% from its agreed purchase price of $ 54.20 per share. This is partly due to the overall decline in technology stocks this month. The Nasdaq has fallen another 11% since the market closed on April 25, the day Twitter accepted Mask’s offer.
“This is probably a negotiation strategy for Elon,” Tony Saconaghi, a senior research analyst at Bernstein, told CNBC’s “Squawk Box” on Friday. “The market has come down a lot. He’s probably using the guise of real active users as a negotiating tactic.”
While the richest person in the world is unaware of the high price, Mask may feel some pressure or compulsion to lower the price to other potential investors on Twitter.
Musk is negotiating with outside investors for equity and preferred financing to reduce his personal partnership on Twitter. If he can get a lower price for a social media company, and when Twitter returns to public ownership or resells, the return for outside investors could be higher.
Then why could he try bail
Although he said he was committed to buying Twitter, Musk may be tempted to throw away the towel after seeing the damage he is doing on paper over his Tesla equity ownership. Shares of Tesla fell nearly 24% last month.
If Musk believes his Tesla loss is related to his Twitter acquisition and potentially $ 1 billion in closing fees and any additional damages he will be charged in court if he loses, he may decide to go for it.
But he will also have to deal with the reputational damage associated with breaking a contract. It is unknown at this time what he will do after leaving the post.
Mask was not immediately available for comment.
Twitter may need to be reconsidered
The way Tiffany and LVMH finally resolved, Twitter may not have had much better options than re-negotiating the mask. The company will probably want to avoid an expensive protracted lawsuit. Employees may flee because the company does not have a clear future plan. Twitter has already reduced costs. On Thursday it fired two executives and said it was holding off.
When Twitter agreed to sell itself to Mask for 54 54.20, the board partially pushed for a higher price because there were no other interested buyers at that price. Twitter’s board has concluded that this year’s peer stocks, such as Facebook and Snap, are unlikely to return to high-level trading anytime soon due to declining valuations.
The best result for Twitter might be accepting less offers from Mask.
A Twitter spokesman was not immediately available for comment.
See: Elon Musk says he is “still committed” to Twitter’s acquisition