Elon Musk’s recent very public back and forth with Twitter has whiplashed the market. Twitter, while initially resist the tycoon, continued with sign an agreement with him worth US$44 billion (£36.6 billion) in April 2022. The deal placed a 38% premium on Twitter’s then share price. While the market would expect a deal like this to add value, more recent events have pushed the premium even further. This will not benefit shareholders on either side.
A lot has changed since Musk’s April offering. Technology stocks have taken a beating by: fear of a recession. Big tech has lost on average 26% in value, while many smaller technology stocks have lost up to 70%. Tesla Shares, What Musk Was use to go back his Twitter deal, haven’t been spared either, as prices nearly halved between early April and late May, though they’ve recovered slightly since then.
Follow stock price gains made by Twitter Announcing Musk have been lost, while management says the platform has spent US$33 million on the deal and has accused the resulting uncertainty for a recent decline in sales. Taking into account the effect of the decline in tech stocks on Twitter’s pre-deal share price, the premium to be paid by Musk will now be significantly higher than the original 38% if the deal goes through.
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The tycoon and his lawyers have cited reasons: not related on the change in the financial deal for Musk’s withdrawal from the offer in July – especially the need for more information about spam accounts. Twitter is now using legal action to force Musk to complete the purchase and an American judge has set a trial date for October. But further legal wrangling that results in an ongoing plunge in Twitter’s stock price won’t benefit Musk — especially if the court forces him to buy — or Twitter’s management, employees and current shareholders. Both parties must be open to renegotiating the deal to protect the company’s current and future shareholders.
Acquisitions are generally strategic steps taken by a company to strengthen its position within an industry. Some buyers want to acquire new capabilities that would otherwise take years to build, others want to enter other markets or introduce new product lines. Sometimes, if the regulators allow it, companies also acquire their competitors to consolidate their position in a market.
These deals are usually done with the intention of mutually maximizing shareholder value. The shareholders of the acquired company hope to take advantage of this by selling at a premium, while the shareholders of the acquiring company want to own a portion of a more powerful and competitive company. This is even true of Musk and his shareholders in this deal who, although a loose collective rather than a corporation, were determined to… to deserve quite a bit when they made the offer to take over Twitter in April.
As it stands, however, the Twitter deal will not mutually maximize shareholder value. In fact, the profits of one group of shareholders can be a clear loss for the other.
If Twitter can successfully enforce this acquisition through the legal system, Musk and its shareholders would have paid significantly too much for the social media platform based on its value in today’s market. The feud has also taken a significant toll employee morale and retention on Twitter. As such, even if Musk is forced to buy the company, Twitter could be in a worse shape than when he originally bid on it. One could argue that this is Musk’s own act after his decision to walk away from the deal, but most shareholder-focused executives would likely have done the same given the shift in financial incentives.
On the other hand, if Musk doesn’t buy Twitter, current shareholders could see the market cap (or the value of all stocks) fall further. It is highly unlikely that in the current economic climate there are any other contenders who would be willing to pay Musk’s original price for Twitter. This is why Twitter management is aggressively pursuing a legal route as the only realistic option to maximize returns for its shareholders. If the deal goes through, however, they won’t face the ramifications of managing a disgruntled workforce, unlike Musk.
A change of heart about a takeover is certain not uncommon. And precautions are taken to prevent deals from failing. In the case of the Twitter deal, there is a 1 billion dollars cancellation fee. Under normal circumstances, this would have been enough incentive for both parties to close the deal. But given the financial gap that exists between April and today, Musk would prefer to pay the termination fee rather than Twitter’s $44 billion bill.
One way to protect shareholders from the effects of this type of market volatility is to make a deal on a mix of stock and cash. In this way, the value of the offer is spread between the two elements rather than being based solely on one or the other. Unfortunately, the Twitter deal is entirely cash-based as Musk wanted to take over the social media platform private to protect freedom of opinion”. Leaving stock on the table could curtail such a plan, and so he may be reluctant to renegotiate that element.
As such, buyers and sellers should keep an eye on the market and be open to renegotiating the price if conditions change as much as they have in recent months. As the legal opinion on whether Twitter will win its case is ambiguous, all stakeholders can benefit more from cooperation. While a clear winner could be declared in court, both groups of shareholder interests are more likely to align in backrooms.
This article by Hamza MudassirTeacher Strategy, Cambridge Judge Business Schoolhas been reissued from The conversation under a Creative Commons license. Read the original article.