There is something dissonant about Twitter’s stock price.
When the market closed on Wednesday, the social media company was trading at $39.30 per share. It has been right there, somewhere between $35 and $41, since May 13. Many, many factors inform a stock price, but in Twitter’s case, one factor should theoretically win out and result in a much higher price. As you may have heard, Elon Musk agreed in late April to buy the company for $54.20 per share. In theory, once that deal closes, any Twitter shareholder who isn’t rolling over their stake into the new, Muskified Twitter will see their shares go poof and be replaced by $54.20 in cash apiece. There is an actual document saying that at a certain point in the near future, a Twitter share will be worth $54.20.
You might expect, then, that Twitter’s stock would be trading extremely close to $54.20. For a minute, it did. On April 25, the day Musk’s agreement to buy the company became public knowledge, the stock closed at $51.02. The next day, it was $51.57, the culmination of a weekslong buildup after Musk had revealed (albeit on an apparently illegal timeline) that he had begun to buy up large chunks of the stock.
Since then, a few things have changed, and Musk has acted in ways that suggest he is either trying to tank the deal or renegotiate it for a lower price. The stock market has fallen hard, and some big-name tech stocks have taken a particularly tough beating. Tesla, the electric car company whose shares make up most of Musk’s net worth, has lost hundreds of billions of dollars in value as its share price has gone from more than $1,000 to the mid-$600s and recently back above $700. Musk’s involvement with Twitter has spooked the investors in his golden goose, who seemed to have a particular aversion to his use of Tesla shares to secure a loan to buy Twitter. Tesla’s stock price has recovered some since Musk announced last week that he was ditching his plan to use Tesla shares in his financing to buy Twitter.
One thing that hasn’t changed is that Musk has an agreement, in writing, to buy Twitter for $54.20 per share. But the market is clearly not convinced that Musk will actually take over the company at a price anywhere close to $54.20, because the stock trades today for less than three-quarters of that amount.
Daniel Ives is a managing director and senior equity research analyst at Wedbush Securities, an investment firm where he covers the technology sector. I talked with Ives on Wednesday about why Twitter’s trading price is so far from Musk’s agreed-upon deal price, how this acquisition differs from others in its weight class, and why investors aren’t confident that Musk will buy Twitter after all. Our interview has been edited for clarity.
Alex Kirshner: Musk agreed to buy the company for $54.20 a share. If there were no variables, would the stock be trading at $54.20 a share?
Daniel Ives: I’d say in any normal deal situation, Twitter right now would be trading between $51 to $53 per share.
What does it mean that Twitter’s stock is not trading anywhere near that range?
I think Musk agreed to buy Twitter in a dramatically different market environment than we’re in today. Tesla has lost $400 billion in market capitalization. And the value of Twitter is significantly lower today, in the market’s eyes, than when the deal was first announced. So it’s added to the uncertainty, because Musk [was] using his Tesla stock, in essence, to buy Twitter. So the game of high-stakes poker backfired for Musk. We believe he essentially got cold feet and looked for a way out of this deal. The bot issue, or fake accounts, has always been a black cloud over Twitter. They claim it’s less than 5 percent. Musk thinks it’s 20 percent–plus, and many believe it’s significantly more than 5 percent. That’s put the deal on hold, and ultimately, the Street is telling you, ‘$54.20 is out the window.’ It’s either a renegotiated, lower price for Twitter in the $42 to $45 range, or Musk tries to pay the billion-dollar breakup fee and walk away.
And where do you see it going now?
We believe right now it’s 50-50 odds that he either walks away or renegotiates for a lower deal. Twitter’s board, in this circuslike atmosphere, their back is against the wall. Because they could fight Musk in court and try to adhere to the $54.20, but as a stand-alone company in the interim, Twitter stock probably would be sub-$30, as the Street anticipates a stand-alone Twitter rather than one that’s bought by Musk. Snap, Twitter’s main competitor, just announced potential disaster results.
It’s caused chaos within the company, and ultimately, it’s put Twitter’s board in a quagmire. If they go down the old Western standoff with Musk, being the richest person in the world, they’re facing a fork-in-the-road situation—if they try to test Musk. Right now, it’s a standstill, and that’s why the stock is trading where it is.
But in a normal environment, this stock would be trading in the low $50 range somewhere.
In a normal, non–twilight zone environment, yeah.
What’s the difference between a normal environment in a deal that takes months and months to close, and this deal that takes months and months to close? It’s not like Microsoft buying Activision Blizzard, where the market clearly thinks the deal will have regulatory problems. Is the difference that investors just believe in the cult of Musk and that he’ll find a way to not pay?
With Musk, any traditional rules in deals and negotiations do not apply, because of the way Elon is, and the Street knows that. Nothing about this has been a typical deal. It’s been a twilight zone environment, and also it’s been a head-scratcher why Elon even bought Twitter in the first place and spent 20 percent of his net worth. The bot issue really complicates the deal, because if fake accounts are 5 percent versus if they’re 20 percent or more, that dramatically changes the value of Twitter.
What would you say about the financial journalists and the lawyers they’ve interviewed who point out that when Musk signed the deal, he waived standard due-diligence rights to look under the hood, and that unless Twitter is lying through its teeth about its numbers, he has almost no way to back out, even if he wants to pay that $1 billion fee? Or the point that there is not really such a thing as a deal being “on hold” after the papers are signed?
Look, there’s obviously legal complications in terms of the structure of the deal.
But the stock trading under $40 is telling you something: that the Street believes Musk and his army of lawyers will find a way out of this deal if it can’t be renegotiated.
How would you rank the factors that have led us here, between Tesla and the tech downturn and whatever else?
The biggest factor is the market downturn, what’s happened to tech stocks, and $400 billion that came off Tesla’s market cap. For Musk, a massive amount of his net worth is from Tesla stock.
Did Musk pulling back Tesla shares from his financing of this deal change your calculus at all, given the other potential complications Twitter could make for Tesla?
It took a little of the overhang off of Tesla’s stock, but that’s been the frustration. Twitter has been a black cloud over Tesla’s stock because of the mechanics of Musk leveraging his shares, and him changing the financing has helped with that, although it continues to be a dark, black cloud that’s over Tesla’s stock.
Do you have any frame of reference for any deal process like this one, with this much uncertainty so quickly after a deal was signed?
In 22 years doing it and hundreds of deals, nothing even comes close. Because just like you said, he agrees to the deal, waives the rights in black and white, and then essentially wakes up one day, gets cold feet, and, in our opinion, looks for a scapegoat. But when you’re worth $250 billion, you can do that.