Elon Musk has agreed to pay $ 44 billion for Twitter, which is far more than it’s worth. His actions show that he does not want to pay so 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: The future of one of the most important social networks in the world is at stake.
- And on a purely financial level, Twitter shareholders have a direct interest in how much they will end up being paid. In addition, Tesla shareholders have an indirect but equally large financial interest in what is happening.
The big picture: Musk has a contractual obligation to buy Twitter at the agreed price and he can certainly afford it.
- Much attention has been focused the $ 1 billion termination fee in the short-term merger agreement. Fewer people have looked at the “specific performance” section of the long-term merger plan that basically says, “If you try to get out of it, 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: This language is especially familiar in cases like this, where the buyer is able to pay in full. (Even if he has to sell a large chunk of Tesla stock to get the cash he needs.)
- The basic precedent is IBP Inc. v. Tyson Foods Inc, with Tyson Foods’ Don Tyson playing Elon Musk. He tried to pull out of an agreed takeover of IBP, but in 2001 he was forced to buy the company from the Delaware Chancellor anyway.
What follows: Neither Musk nor Twitter will particularly want a long court battle. Twitter may agree to a small discount on the agreed price, just to complete the deal.
- After LVMH tried to withdraw from Tiffany’s market at the beginning of the pandemic, for example, this deal resulted in a 2.5% discount on the originally agreed price. A similar discount in this case would reduce the price of Twitter to $ 52.80 per share, from $ 54.20.
- Alternatively, Musk could pay Twitter a large sum to get rid of his obligation to buy the company. When, for example, Apollo withdrew from the Huntsman market in 2008, it paid a $ 1 billion settlement – much higher than the $ 325 million write-off fee in the merger agreement.
The bottom line: “Divorce fees are not an option to move away from,” says Mitu Gulati, a law professor at the University of Virginia. “These performance promises are very workable. Especially in Delaware.”