Musk’s endgame for twitter could be a lower buyout price

Elon Musk has agreed to pay $44 billion for Twitter, which is way more than it’s worth. His actions indicate that he doesn’t want to pay that much – he still wants the company, just not at that price. So the big question in the markets is, will he eventually buy the company, and if so, how much will he end up paying?

Why it matters: The future of one of the most powerful social networks in the world is at stake.

  • And from a purely financial point of view, Twitter shareholders have a direct interest in how much they ultimately get paid. In addition, Tesla shareholders have an indirect but equally significant financial interest in what is happening.

The big picture: Musk has a contractual obligation to buy Twitter at the agreed price, and he can certainly afford it.

  • Much attention has been paid to the $1 billion termination fee in the short-term merger agreement. Fewer people have looked at the “specific performance” section of the long-term merger plan, which basically says, “If you try to avoid this, we can take you to court in Delaware, and the court will force you to buy the company at the agreed price.”

Between the lines: Such language is particularly relevant in cases like this, where the buyer has the option to pay in full. (Even if he has to sell a large chunk of Tesla stock to get the money he needs.)

  • The main precedent is: IBP Inc. against Tyson Foods Inc, with Don Tyson of Tyson Foods as Elon Musk. He tried to pull out of an agreed-upon takeover of IBP, but was forced to buy the company by the Delaware Chancery Court in 2001.

What’s next: Neither Musk nor Twitter in particular will want a lengthy lawsuit. Twitter may agree to a small discount on the agreed price, just to close the deal.

  • For example, after LVMH tried to refrain from buying Tiffany at the start of the pandemic, that deal went through with a 2.5% discount off the originally agreed price. A similar discount in this case would drop Twitter’s price to $52.80 per share, from $54.20.
  • Alternatively, Musk could pay Twitter a large fee to be relieved of its obligation to buy the company. For example, when Apollo backed out to buy Huntsman in 2008, it paid a $1 billion settlement — far more than the $325 million breakout fee in the merger agreement.

It comes down to: “A break-up fee is not an option to run away,” said University of Virginia law professor Mitu Gulati. “Specific performance promises are highly enforceable. Especially in Delaware.”

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