Explainer: Can Elon Musk renegotiate a lower price for the Twitter deal if the company’s stock plummets?

Twitter shares have fallen to their lowest levels since the social media company agreed to sell itself to Elon Musk for US$44 billion (approximately Rs.3,37,465 crore) on April 25, bringing the Raising questions about whether the world’s richest person will try to renegotiate the deal.

On Tuesday, the implied probability of the deal closing at the agreed price fell below 50 percent for the first time as Twitter shares fell below $46.75 (around 3,600 rupees). That’s halfway between the transaction price and the price of the shares before Musk announced on April 4 that he’d acquired a stake in the social media company.

The shares closed at $47.26 (about Rs.3,600), giving the company a market value of $36 billion (about Rs.2,781.14 crore).

The news that Musk would lift a ban on former President Donald Trump’s Twitter account, while politically significant, didn’t move the stock.

Twitter shares have tumbled along with the broader meltdown in tech stocks as investors worried about inflation and a potential economic slowdown. Some investors, like short seller Hindenburg Research, have speculated whether Musk would attempt to negotiate a lower deal price before closing.

Musk has not indicated that he plans to resume negotiations, and his representatives have declined to comment on the issue.

Here you will find answers to some important questions.

Why would Musk want to renegotiate the deal?

Musk has an estimated net worth of nearly $240 billion, according to Forbes, but most of his wealth is tied up in shares in Tesla, the electric-car maker he runs.

Musk has already tried to raise some money to fund the Twitter acquisition. He sold US$8.5 billion (approximately Rs. 6,5671 crore) worth of Tesla shares and took out a US$12.5 billion (approximately Rs shares was collateralised. Last week, he reduced that margin loan to $6.25 billion (about Rs. 48,287 crore) after bringing in co-investors. Musk said in a regulatory filing that he may seek more funding for the deal.

While Musk has said he doesn’t care about the economics of buying Twitter, some investors believe the 27 percent drop in Tesla shares since announcing his stake is partly due to concerns that he might buy more shares must sell. Therefore, if Musk can negotiate a lower purchase price, Tesla stock would be under less pressure. Some co-investors may goad him if they have concerns about overpayment.

How could Musk negotiate a lower price?

Musk can threaten to walk away from the deal unless Twitter’s board agrees to resume negotiations. He is contractually obligated to pay a $1 billion breakup fee.

There are many precedents for renegotiation. When the COVID-19 pandemic erupted in 2020, causing a global economic shock, several companies rescheduled agreed acquisitions.

In one case, French retailer LVMH threatened to walk away from a deal with Tiffany & Co. The US jewelry retailer agreed to increase the acquisition price by $425 million (approx.

The Simon Property Group, the largest operator of US shopping centers, was able to reduce the purchase price for a majority stake in the rival Taubman Centers by 18 percent to 2.65 billion US dollars.

Are there risks in trying to renegotiate?

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

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

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

Among the companies that have been fighting acquirers in court is medical technology company Channel Medsystems, which is suing Boston Scientific for trying to back out of its $275 million (around Rs. 2,124 billion) deal. In 2019, a judge ruled the deal should go ahead, and Boston Scientific paid Channel Medsystems an undisclosed settlement.

Buyers seeking a way out sometimes resort to “material adverse effects” clauses in their merger agreement, arguing that the target company has been significantly harmed. But the language in the Twitter deal agreement, like many recent mergers, doesn’t allow Musk to walk away because of a deteriorating business environment, such as a drop in ad demand, or because Twitter’s stock has fallen.

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

© Thomson Reuters 2022 Explainer: Can Elon Musk renegotiate a lower price for the Twitter deal if the company’s stock plummets?

Ryan Sederquist

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