Twitter Nosedives After Musk Pumps Brakes on Deal



Twitter (TWTR) shares are set to dive at the US open, with pre-market indications pointing to a 15% plunge to less than $39, the stock’s price just before Musk had disclosed his initial 9% stake at the beginning of April. The world’s richest man placed the $44 billion deal on hold, citing doubts about the amount of spammers and bots on Twitter. He later added that he’s still committed to the acquisition.

Screenshot of Musk's tweet from May 13

The potential retreat isn’t coming as a surprise to everyone. Throughout the biggest M&A saga of 2022, shares in the social network company never got close to Musk’s $54.20 offer level, reaching their narrowest discount of 5% at the end of April. By Thursday’s close, the discount had already widened to 20%. By contrast, similar deals since 2005 had spreads of 2-4% a month after being announced, according to Pitchbook data.

Meanwhile, Twitter’s peers in the tech sector have been caught in a tailspin, raising concern that Musk may be over-spending.

Skeptics

High-profile skeptics of the deal include short seller Hindenburg, who described the offer level as too high on Monday. Disclosing a short position in the stock, Hindenburg cited a high risk that Musk will pay the $1 billion break free or re-price the entire deal at a much lower level. Its founder Nate Anderson couldn’t hold back his glee at Friday’s news:

Nate Anderson's May 13 tweet
Anderson’s indictment of Musk’s plans included weak quarterlies and yet another admission that user numbers had been overstated. “As indicated by Musk, the platform is flooded with bots, spam, and scam accounts that likely inflate its genuine user metrics even further,” Hindenburg wrote four days before Musk put his takeover on hold, citing this exact issue.

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down side

The short seller sees serious downside for Twitter’s stock if Musk walks away. Between the selling pressure from Musk’s promised stake sale if no takeover takes place, the wider Nasdaq’s 17% slump since talks started and Twitter’s weak results, a failure of the deal could spell up to 50% in downside to Twitter stock, Hindenburg reasoned in its letter.

Musk’s deal isn’t off the table, but the road ahead is marked by uncertainty. Trading on the likelihood of a successful outcome, or merger arbitrage, is fraught with downside risk and only a few percent of upside potential, Morningstar’s Chief US Market Strategist Dave Sekera cautioned in a May 6 note.

“There’s a good reason for most people to leave this strategy to the professionals,” he wrote.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalized recommendation. The information contained within should not be a person’s sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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www.morningstar.co.uk

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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