Elon Musk can’t walk away from a billion dollar Twitter deal

Musk’s plan to buy Twitter has alarmed policymakers around the world.

Joe Skipper | Reuters

Elon Musk can’t walk away from his deal to acquire Twitter by paying an agreed-upon breakup fee of $1 billion. It’s not that simple.

Musk Friday tweeted that it has decided to put its Twitter acquisition on hold because it is looking into whether the volume of fake/spam accounts on Twitter is actually just 5%, as the company has long claimed. He followed that up with another tweet in which he reiterated that he was still committed to the acquisition.

But he risks a lawsuit from Twitter for breaching a contract that could cost the world’s richest man several billion dollars.

More than a dismantling fee

Musk and investors may want a better deal

Musk’s reason for suspending the transaction could be similar: he might want Twitter to lower the sale price. Twitter shares fell more than 8% on Friday and are down about 23% from Musk’s agreed purchase price of $54.20 per share. Part of the decline is related to the general decline in technology stocks this month. The Nasdaq is down another 11% since the market closed on April 25, the day Twitter accepted Musk’s offer.

“This is probably a negotiating tactic on Elon’s behalf,” Bernstein senior research analyst Tony Sakunagi said on CNBC’s “Squawk Box.” “The market has fallen a lot. The guise of real active users is probably being used as a negotiating trick.”

Musk may feel some pressure or obligation to other potential investors in Twitter to lower the price, even if the world’s richest man is more neutral about prices.

Musk is in talks with outside investors about both stocks and preferred financing to reduce his personal stake in Twitter. If he can get a lower price for Twitter, the returns could be higher for outside investors if and when Twitter goes back into public ownership or is resold.

Why can he still try on bail

Although he said he remains committed to buying Twitter, Musk may be tempted to throw in the towel given the losses he has incurred on paper in relation to Tesla ownership. Tesla shares are down about 24% from last month.

If Musk believes his losses in Tesla are related to his Twitter acquisition and are large enough to overcome both the $1 billion termination fee and any additional damages that would be charged in court if he lost, he could reasonably decide to walk away from him.

But he will also have to deal with the reputational damage associated with a deal breach. It is not clear that any future company would risk selling to Musk with such a track record.

Musk could not be reached for comment.

Twitter may need to be renegotiated

Just as Tiffany and LVMH eventually settled, Twitter may not have many good options outside of renegotiating with Musk. The company will likely want to avoid a lengthy expensive lawsuit. Employees may flee as the company will not have a clear future plan. Twitter is already cutting costs. On Thursday, it fired two executives and said it had halted hiring.

When Twitter agreed to sell itself to Musk for $54.20, the board didn’t bother pushing for a higher price in part because there were no buyers interested at that price. Twitter’s board of directors has come to the conclusion that it is not likely to soon return to trading at higher levels given the declining valuation this year in peer stocks such as Facebook and Snap.

The best result on Twitter may be accepting an offer from Musk.

A Twitter spokesperson was not immediately available for comment.

WATCH: Elon Musk says he ‘remains committed’ to Twitter acquisition

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