The Musk-Twitter Endgame

Elon Musk has agreed to pay $44 billion for Twitter, which is way more than it’s worth. His actions indicate he doesn’t want to pay that much – he still wants the business, but 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 is this important: 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 vested interest in how much they will end up getting paid. On top of that, Tesla shareholders have an indirect but equally important financial interest in what’s going on.

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

  • Much attention has been paid to the $1 billion termination fee in the simplified merger agreement. Fewer people viewed the “specific performance” section in the detailed merger plan which basically says, “If you try to get out of this, we can sue you in Delaware, and the court will force you to buy company at the agreed price.”

Between the lines: Such language is particularly relevant 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 previous key 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 he was forced to buy the company anyway by the Delaware Chancery Court.

And after: Neither Musk nor Twitter will particularly want a lengthy legal battle. Twitter might accept a small discount off the agreed price, just to close the deal.

  • After LVMH tried to back out of buying Tiffany at the start of the pandemic, for example, that deal ended up continuing at a 2.5% discount from the originally agreed price. A similar discount in this case would bring Twitter’s price down to $52.80 per share from $54.20.
  • Alternatively, Musk could pay Twitter a hefty fee to be released from its obligation to buy the company. When Apollo walked away from buying Huntsman in 2008, for example, it paid a $1 billion settlement — far more than the $325 million breach fee in the merger deal.

The bottom line: “Severance pay is not an option to walk away,” says Mitu Gulati, a law professor at the University of Virginia. “Specific performance promises are very enforceable. Particularly in Delaware.”

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