Can Elon Musk Renegotiate a Lower Price for His Twitter Deal?

Twitter shares have plunged to their lowest degree because the social media firm agreed to promote itself to Elon Musk for $44 billion(roughly Rs. 3,37,465 crore) on April 25, elevating questions over whether or not the world’s richest individual will attempt to renegotiate the deal.

On Tuesday, the implied likelihood of the deal closing on the agreed worth fell under 50 % for the primary time, when Twitter shares dropped under $46.75 (roughly Rs. 3,600). That is midway between the deal worth and the value of the shares earlier than Musk revealed he had amassed a stake within the social media firm on April 4.

The shares closed at $47.26 (roughly Rs. 3,600), giving the corporate a market worth of $36 billion (roughly Rs. 2,781,14 crore).

News that Musk would elevate a ban on former President Donald Trump’s Twitter account, whereas important politically, didn’t transfer the inventory.

Twitter shares have plunged together with the broader collapse in expertise shares, as buyers fretted over inflation and a potential financial slowdown. Some buyers, akin to quick vendor Hindenburg Research, have speculated about whether or not Musk would attempt to negotiate a decrease deal worth earlier than closing.

Musk has not indicated he’s planning to re-open negotiations and his representatives have declined to touch upon the difficulty.

Here are solutions to some key questions.

Why would musk need to renegotiate the deal?

Musk has an estimated web value of just about $240 billion (roughly Rs. 18,57,204 crore) in accordance with Forbes, but most of his wealth is tied up in shares of Tesla, the electrical automobile maker he leads.

Musk has already moved to lift some money to fund the acquisition of Twitter. He bought $8.5 billion (roughly Rs. 6,5671 crore) value of Tesla shares and took out a $12.5 billion (roughly Rs. 96,575) margin mortgage secured towards his Tesla inventory. Last week he lowered that margin mortgage to $6.25 billion (roughly Rs. 48,287 crore) after bringing in co-investors. Musk stated in a regulatory submitting he might search extra funding for the deal.

While Musk has stated he doesn’t care in regards to the economics of shopping for Twitter, some buyers assume the 27 % drop in Tesla shares since he revealed his stake is pushed partly by issues he might must promote extra shares. Therefore Tesla’s inventory can be underneath much less strain if Musk can negotiate a decrease acquisition worth. Some co-investors might egg him on in the event that they turn into involved about overpaying.

How may musk negotiate a cheaper price?

Musk can threaten to stroll away from the deal until Twitter’s board agrees to reopen negotiations. He is contractually obligated to pay a $1 billion (roughly Rs. 7,723 crore) break-up charge, however Twitter must sue to get greater than that in damages or attempt to power Musk to finish the deal.

There is loads of precedent for a renegotiation. Several firms repriced agreed acquisitions when the COVID-19 pandemic broke out in 2020 and delivered a international financial shock.

In one occasion, French retailer LVMH threatened to stroll away from a cope with Tiffany & Co. The US jewelry retailer agreed to decrease the acquisition worth by $425 million (roughly Rs. 3,282 crore) to $15.8 billion (roughly Rs. 1,220,49 crore).

Simon Property Group, the largest US mall operator, managed to chop its buy worth of a controlling stake in rival Taubman Centers by 18 % to $2.65 billion.

Are there dangers to making an attempt to renegotiate?

There isn’t any certainty that the technique would work, and it may find yourself costing Musk extra money.

First, Musk must persuade Twitter he would actually stroll away. Then there are authorized hurdles, together with a “particular efficiency” clause that the social media firm can cite for a decide to power Musk to finish the deal.

Acquirers who lose such a case are virtually by no means pressured to finish an acquisition, however goal firms can search financial reduction for the value of the deserted deal.

Companies which have fought acquirers in court docket embrace medical expertise agency Channel Medsystems, which sued Boston Scientific for making an attempt to stroll away from their $275 million (roughly Rs. 2,124 crore) deal. In 2019, a decide dominated the deal must be accomplished and Boston Scientific paid Channel Medsystems an undisclosed settlement.

Acquirers in search of an out typically flip to “materials antagonistic impact” clauses of their merger settlement, arguing the goal firm has been considerably broken. But the language within the Twitter deal settlement, as in lots of latest mergers, doesn’t enable Musk to stroll away due to a deteriorating enterprise setting, akin to a drop in demand for promoting or as a result of Twitter’s shares have plunged.

Musk additionally waived his proper to hold out due diligence when he negotiated the Twitter deal, making an attempt to get the corporate to just accept his “finest and remaining” supply. This makes it more durable for him to argue in court docket that Twitter misled him.

© Thomson Reuters 2022