Elon Musk needs a release from his untimely Twitter offer

There would have been a trigger in the covenants of the margin loan that would force its repayment or perhaps allow the banks to seize and sell the underlying pledged Tesla shares if the Tesla stock price fell 40 %.

Since the initial announcement, Musk’s advisers have scrambled to find co-investors to reduce Musk’s exposures. They had some success raise approximately $7 billion from a group of investors which include Sequoia Capital, Qatar Holdings and Saudi Prince Alwaleed bin Talal. They seek to harvest more.

It would appear that Musk belatedly recognized that he was in danger of paying far too much for Twitter and, given the continuing stock market implosion, putting a huge chunk of his personal wealth – both his paper wealth and the 8 $.5 billion he raised by selling Telsa stock early in the process – jeopardizing and destabilizing the already falling Tesla stock price in the process.

His problem is that there is no legal exit from his announced offer. Twitter’s board may hold him back unless he can raise funding and Twitter’s board and Musk would likely be sued by Twitter’s investors if he tried to walk away or reduce the price.

Nevertheless, Musk appears to be trying to set the stage to either drop the offer or renegotiate his terms and lower the price.

While pretending that he remains attached to the agreementhe cited a recent Twitter filing that claims fake accounts on his social media platform account for less than five percent of his users for suspending the offer while his offer team tests Twitter’s claim.

Twitter’s estimate of fake accounts is one it has consistently made in past filings, but which most analysts say underestimates the true proportion.

Twitter inserts some caveats into the filings, explicitly stating that the number could be higher, and Musk was given the opportunity, which he did not take, to do proper due diligence before committing to the offer.

This makes Musk’s suspension of the deal a pretext to renegotiate the offer price or try to walk away.

If he was able to drop the offer, he would pay a $1 billion “break” fee, although this might ultimately be seen as a small price to pay to avoid throwing away many multiples of that amount. and put his personal fortune at risk. by making the offer. Beyond the margin loan for the Twitter offering, Musk has already raised funds using his Tesla shares as collateral.

It would appear that Musk belatedly recognized that he was in danger of paying far too much for Twitter and, given the continued implosion of stock markets, jeopardizing much of his personal wealth and destabilizing the stock price. Tesla stock already down in the process.

The offer for Twitter made little financial sense when it was first unveiled – it looked like a vanity buy rather than a rational game – but it looks much worse in the current uncertain environment of the stock market and with the currency that underpins Musk’s position, Tesla shares, so heavily devalued.

It’s the kind of deal that wouldn’t have looked so far off the terms had it been struck before the implosion in tech stocks began in November of last year. At their peak in early November, Tesla shares traded at just under $1,230 and the company was valued at $1.3 trillion, about 40% more than it is today.

Soaring inflation and the sharp rise in interest rates that occurred as central banks began to tighten monetary policy by raising rates and withdrawing liquidity interrupted the boom in tech stocks that had inflated Tesla shares.

There’s now a bear market in technology and an even bigger bear market in Tesla stock, thanks to Twitter’s bid, even though Tesla’s operational and financial performance has been strong. Investors simply pay far less for revenue or, in the case of Twitter, potential future revenue.

The post-financial crisis eras of near-zero interest rates and unlimited liquidity have abruptly shifted to the new post-pandemic challenges of rapidly rising rates, steadily shrinking liquidity, and the abrupt unwinding of steep valuations. strains that the previous era encouraged.

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Musk seems to have failed to recognize, until he was on the hook for $44 billion, the magnitude of the change in the environment. Having belatedly realized his predicament, the multi-billion dollar question marks floating over Twiitter and Tesla’s future and their stock price are whether he can actually do anything about it.