Tech

Explainer: Can Elon Musk renegotiate a lower price for the Twitter trade as the company’s stock plunges?


Twitter shares fell to their lowest levels since the social media company agreed to sell itself to Elon Musk for $44 billion (about Rs 3,37,465) on April 25, raising questions about whether Will the richest person in the world try to renegotiate the deal?

On Tuesday, the implied probability of a trade ending at the agreed price fell below 50% for the first time, when Twitter shares fell below $46.75 (about Rs. 3,600). It is half between the agreed price and the price of the previous stock Musk revealed that he accumulated shares in the social media company on April 4.

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

News that Musk will lift the ban on former President Donald Trump’s Twitter account, while politically significant, hasn’t moved stocks.

Twitter shares plunged along with a larger fall in tech stocks, as investors worried about inflation and the possibility of an economic slowdown. Some investors, such as short seller Hindenburg Research, have speculated on whether Musk would attempt to negotiate a lower deal price before closing.

Musk did not say he plans to reopen talks, and his representatives declined to comment on the matter.

Here are answers to some key questions.

Why does the musk want to renegotiate the deal?

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

Musk has moved to raise some cash to fund the Twitter acquisition. He sold $8.5 billion (about 6.5671 crore) worth Tesla shares and a margin loan of $12.5 billion (approximately Rs 96,575) secured by his Tesla shares. Last week, he reduced that margin loan to $6.25 billion (approximately Rs 48,287) after bringing in co-investments. Musk said in a regulatory filing he may seek additional funding for the deal.

While Musk has said he doesn’t care about the economics of buying Twitter, some investors think Tesla stock is down 27% since he disclosed his stake in part due to concerns he may have to sell more shares. As a result, Tesla’s stock will come under less pressure if Musk can negotiate a lower buyback price. Some co-investors may encourage him if they are concerned about paying too much.

How can musk negotiate a lower price?

Musk could threaten to walk away from the deal unless Twitter’s board agrees to reopen talks. He’s contractually obligated to pay a $1 billion breakup fee (about 7,723 crore), but Twitter will have to sue for more than the amount of damages or try to force Musk to fulfill the settlement. favorable.

There is a lot of precedent for a renegotiation. Several companies have revalued acquisitions agreed to when the COVID-19 pandemic broke out in 2020 and caused a global economic shock.

In one case, French retailer LVMH threatened to waive its deal with Tiffany & Co. The US jewelry retailer has agreed to reduce its acquisition price of $425 million (approximately Rs 3,282) to $15.8 billion (approximately Rs 1,220.49).

Simon Property Group, the largest mall operator in the United States, slashed its purchase price for a rival controlling stake in Taubman Centers by 18 percent to $2.65 billion.

Is there a risk in trying to renegotiate?

There’s no guarantee the strategy will work, and it could cost Musk more money.

First, Musk will have to convince Twitter that he’s actually walking away. Then there are the legal hurdles, including a “specific performance” clause that the social media company can invoke to a judge to force Musk to close the deal.

Buyers who lose in such a case are almost never forced to complete an acquisition, but the targeted companies may seek monetary relief from the price of the abandoned deal. .

Companies that have fought acquirers in court include medical technology company Channel Medsystems, which sued Boston Scientific for trying to back out of a $275 million (approximately rs 2,124) deal. their. In 2019, a judge ruled that the deal had to be finalized and Boston Scientific paid Channel Medsystems a nondisclosure agreement.

Acquirers seeking settlement sometimes turn to the “severe adverse effect” provisions of their merger agreement, arguing that the target company has suffered substantial damage. However, the language in the transaction agreement with Twitter, as in many recent mergers, does not allow Musk to waive because of a deteriorating business environment, such as reduced advertising demand or due to the stock market. Twitter’s plunge.

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

© Thomson Reuters 2022




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