May 14, 2022 - Economy

The Musk-Twitter endgame

Bret Taylor's "we remain committed" tweet

A tweet from Bret Taylor, chair of the Twitter board

Elon Musk has agreed to pay $44 billion for Twitter, which is much more than it's worth. His actions indicate that he doesn't want to pay that much — he still wants the company, just not at that price. So the big question in the markets is: Will he end up buying the company, and, if so, how much will he end up paying?

Why it matters: At stake is the future of one of the most consequential social networks in the world.

  • And on a purely financial level, Twitter shareholders have a direct interest in how much they're going to end up getting paid. On top of that, Tesla shareholders have an indirect but similarly large financial interest in what happens.

The big picture: Musk has a contractual obligation to buy Twitter at the agreed price, and he can certainly afford to do so.

  • A lot of attention has focused on the $1 billion termination fee in the short-form merger agreement. Fewer people have looked at the section on "specific performance" in the long-form merger plan that basically says: "If you try to back out of this, we can take you to court in Delaware, and the court will force you to buy the company at the agreed price."

Between the lines: Such language is particularly germane in cases like this, where the buyer has the ability to pay in full. (Even if he has to sell a large chunk of Tesla stock to get the cash he needs.)

  • The key precedent is IBP Inc. v. Tyson Foods Inc, with Don Tyson of Tyson Foods playing the role of Elon Musk. He tried to back out of an agreed acquisition of IBP, but in 2001 was forced to buy the company anyway by the Delaware Chancery Court.

What's next: Neither Musk nor Twitter will particularly want a drawn-out court battle. Twitter might agree to a small discount to the agreed price, just to get the deal done.

  • After LVMH tried to back out of buying Tiffany at the start of the pandemic, for instance, that deal ended up going ahead at a 2.5% discount to the originally-agreed price. A similar discount in this case would bring the Twitter price down to $52.80 per share, from $54.20.
  • Alternatively, Musk could pay Twitter a large fee to be released from his obligation to buy the company. When Apollo backed out of buying Huntsman in 2008, for instance, it paid a settlement of $1 billion — much larger than the $325 million break-up fee in the merger agreement.

The bottom line: "A breakup fee is not an option to walk away," says University of Virginia law professor Mitu Gulati. "Specific performance promises are very enforceable. Particularly in Delaware."

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