With Twitter shares down, see if Musk can renegotiate $44 billion deal

Shares of Twitter Inc. fell to the lowest level since the social media company agreed to sell itself to Elon Musk for $44 billion on April 25. The lawsuit raised the question: could Musk, the richest person in the world, try to renegotiate the deal?

Last Tuesday (10), when Twitter shares dropped below $46.75, the implied probability of a deal closing at the agreed price dropped below 50% for the first time.

The figure is halfway between the deal’s price and the stock price before Musk revealed he had amassed a 9.2% stake in the company on April 4.

With shares closed at $47.26, the company had a market value of $36 billion.

The news that Musk would lift a ban on former President Donald Trump’s Twitter account, while politically significant, did not affect stocks.

Twitter shares tumbled alongside a broader collapse in tech stocks, with investors worried about inflation and a possible economic slowdown.

Some investors, such as seller Hindenburg Research, speculated whether Musk would try to negotiate a lower price before closing the deal.

Musk has not indicated he plans to reopen negotiations and his representatives declined to comment.

Here are answers to some key questions.

Why did Musk want to renegotiate the deal?

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

He has already moved to raise some cash to fund the Twitter takeover, selling $8.5 billion of Tesla stock and taking out a $12.5 billion margin loan secured against his Tesla shares.

Last week, he reduced that margin loan to $6.25 billion after bringing in co-investors. Musk said in a regulatory filing that he may seek more funding for the deal.

While he has said he doesn’t care about the financials of buying Twitter, some investors think the 27% drop in Tesla shares since he revealed his stake in the social network was driven in part by concerns he could having to sell more shares.

Therefore, Tesla shares would be under less pressure if Musk could negotiate a lower acquisition price. Some co-investors may instigate you if they are concerned about overpayment.

How could Musk negotiate a lower price?

Musk could threaten to back out of the deal unless Twitter’s board agrees to reopen negotiations.

He’s contractually obligated to pay a $1 billion breakup fee, but Twitter would have to sue to get more than that in damages, or try to force Musk into the settlement.

There are many precedents for renegotiation. Several companies reassessed the acquisitions agreed when the Covid-19 pandemic broke out in 2020 and caused a global economic shock.

In one case, French retailer LVMH threatened to back out of a deal with Tiffany & Co. The US jewelry retailer agreed to lower the purchase price by $425 million to $15.8 billion.

Simon Property Group Inc., the largest US mall operator, managed to reduce the purchase price of a controlling stake in rival Taubman Centers Inc. by 18% to $2.65 billion.

Are there risks in trying to renegotiate?

There is no certainty that the strategy would work and could end up costing Musk more money.

First, Musk would have to convince Twitter that he was really leaving.

Then there are legal hurdles, including a “specific performance” clause that the social media company can cite to a judge to force Musk to complete the deal.

Acquirers who lose this case are almost never forced to complete an acquisition, but target companies may seek monetary relief at the price of the abandoned deal.

Companies that have fought buyers in court include medical technology company Channel Medsystems Inc., which sued Boston Scientific Corp. for trying to back out of his $275 million deal.

In 2019, a judge ruled that the settlement should be completed and Boston Scientific paid Channel Medsystems an undisclosed amount.

Acquirers seeking an exit sometimes resort to “material adverse effect” clauses in their merger agreement, arguing that the target company has been significantly harmed.

But the language of the Twitter deal, as with many recent mergers, doesn’t allow Musk to walk away because of a deteriorating business environment, such as a drop in demand for advertising, or because Twitter’s stock has plummeted.

Musk also waived his right to perform due diligence when he negotiated the deal with Twitter, trying to get the company to accept his “best and final” offer.

That makes it harder for him to argue in court that Twitter tricked him.