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 chance of the deal closing on the agreed value fell under 50 p.c for the primary time, when Twitter shares dropped under $46.75 (roughly Rs. 3,600). That is midway between the deal value 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 carry a ban on former President Donald Trump’s Twitter account, whereas vital politically, didn’t transfer the inventory.

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

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

Here are solutions to some key questions.

Why would musk wish to renegotiate the deal?

Musk has an estimated internet price of virtually $240 billion in accordance with Forbes, but most of his wealth is tied up in shares of Tesla, the electrical automotive maker he leads.

Musk has already moved to boost some money to fund the acquisition of Twitter. He offered $8.5 billion (roughly Rs. 6,5671 crore) price of Tesla shares and took out a $12.5 billion (roughly Rs. 96,575) margin mortgage secured in opposition to his Tesla inventory. Last week he decreased 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 concerning the economics of shopping for Twitter, some buyers assume the 27 p.c drop in Tesla shares since he revealed his stake is pushed partly by issues he might should promote extra shares. Therefore Tesla’s inventory can be beneath much less stress if Musk can negotiate a decrease acquisition value. Some co-investors might egg him on in the event that they change 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 payment, however Twitter must sue to get greater than that in damages or attempt to drive Musk to finish the deal.

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

In one occasion, French retailer LVMH threatened to stroll away from a take care of Tiffany & Co. The US jewelry retailer agreed to decrease the acquisition value 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 value of a controlling stake in rival Taubman Centers by 18 p.c to $2.65 billion.

Are there dangers to attempting to renegotiate?

There is not 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 “specific performance” clause that the social media firm can cite for a choose to drive Musk to finish the deal.

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

Companies which have fought acquirers in courtroom embrace medical know-how agency Channel Medsystems, which sued Boston Scientific for attempting to stroll away from their $275 million (roughly Rs. 2,124 crore) deal. In 2019, a choose dominated the deal needs to be accomplished and Boston Scientific paid Channel Medsystems an undisclosed settlement.

Acquirers searching for an out typically flip to “material adverse effect” 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 current mergers, doesn’t enable Musk to stroll away due to a deteriorating enterprise surroundings, comparable 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, attempting to get the corporate to just accept his “best and final” provide. This makes it tougher for him to argue in courtroom that Twitter misled him.

© Thomson Reuters 2022