May 11, 2022 - Economy

Adventures with Twitter merger-arb math

Note: The Snap-adjusted probability assumes that Twitter would be trading at the Snap share price, absent Musk's takeover deal. The unadjusted probability assumes it would be trading at $39.31. Data: YCharts; Axios calculations. Chart: Axios Visuals

Does the market think that Elon Musk's bid for Twitter is likely to fail? A Reuters story on Tuesday suggested as much, after Twitter shares fell to $46.75. That was roughly halfway between Musk's $54.20 takeover price, and the $39.31 at which Twitter shares were trading before Musk revealed he had bought a substantial stake in the company.

Why it matters: There is undoubtedly worry in the market that this deal might not go through. But professional merger arbitrageurs say the market-implied probability of a deal is closer to 65% than 50%. And other calculations put the probability higher still.

How it works: The big unanswerable question is where Twitter shares are likely to end up trading if Musk, for whatever reason, drops his bid and walks away. The lower the answer, the higher the market-implied probability that the deal is still going to go through.

Reality check: Most merger arbs reckon that Twitter shares would fall to about $34 in the event the deal fails, according to Chris Pultz, a portfolio manager at Kellner Capital who specializes in the strategy.

  • Plug that number into the formula, and you come up with a probability of about 65% that the deal will happen.

Other numbers can be used. The Reuters team is using a downside price of $39.31. However, Axios prefers to use a downside price of wherever Snap shares happen to be trading. After all, the Twitter and Snap share prices moved largely in lockstep with each other until the Musk drama started.

Data: YCharts; Chart: Axios Visuals

By the numbers: If you reckon that Twitter shares would fall to $22.89 absent the Musk bid — which is the level Snap shares are currently trading — then the market-implied probability of a successful bid is reasonably high, at 76%.

Between the lines: Musk is still teasing the markets, keeping open the possibility that the deal won't happen.

Musk tweet about "if" the deal happens
"If Twitter acquisition completes" Elon Musk tweet via Twitter
  • The presence of foreign investors in the deal has also raised worries that CFIUS will get involved, pushing back the closing date — and the date that shareholders get paid.
  • It's also still far from clear where Musk will raise the cash he needs to complete the deal.

The bottom line: There's decent money to be made buying Twitter at current levels, and holding out for a $54.20 check when the deal closes. But where there's reward, there's always risk.

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