On the basis of Tesla’s performance, Elon Musk’s proposal to acquire Twitter is a risky bet. Shares of Tesla (TSLA) have fallen approximately 20% since CEO Elon Musk originally announced ambitions to acquire Twitter and take it private. That’s why Twitter’s stock (TWTR) is presently more than 10% below Musk’s suggested acquisition price of $54.20 per share. The stock price of Twitter is now about $47.50.
At $46.76, the midpoint between Musk’s takeover bid and the $39.31 share price at which Musk initially stated that he had bought a position of more than 9 percent in Twitter early last month, that’s only a few cents over the $46.76 mark. Even though he recently secured $7 billion in funding from an impressive group of investors that includes mutual fund powerhouse Fidelity, venture capital giant Sequoia, and Oracle (ORCL) co-founder Larry Ellison, this seems to suggest investors have doubts about Musk getting the deal done at the original price.
In addition, Morgan Stanley (MS) has committed $12.5 billion in funding backed by margin loans based on Musk’s Tesla stock holdings. If Tesla’s stock continues to fall, would Musk have to cut his bid price in order to get the merger done? Will he ever return to Twitter? Alternatively, might someone with a higher price and more stable finance enter the market? Another bidder would have come up to make an offer at this point, therefore this seems doubtful. The deal’s prospects are being questioned more and more.
WALL STREET SKEPTICAL OF DEAL PRICE
In a study released earlier this week, research company Hindenburg warned that the acquisition price of Twitter might be reduced by as much as 30 percent. In the last several years, Hindenburg has gained notoriety for its pessimistic assessments of electric car start-ups Nikola and Lordstown Motors.
As a result, Hindenburg stands to gain if Twitter’s stock price declines. Despite Hindenburg’s support for Musk’s attempts to take the firm private, “we see no rationale for him to do so at current prices,” the company said in its report. Musk’s objective of lowering Twitter’s dependence on advertising, which presently forms the overwhelming bulk of its income, would be more difficult to achieve if Twitter were to take on additional debt to fund the transaction, according to the business.
Additionally, Hindenburg said that “putting both the future of Twitter and that of Tesla on a foundation of additional equity-backed margin loans or perhaps more sales of Tesla shares in a volatile market increases the risk to both organizations.” However, Musk has frequently brushed off these worries. When Hindenburg criticized him on Twitter, he answered with a Monty Python joke, stating, “Don’t forget to look on the bright side of life occasionally!”
CHOSE TO STAY UNCONVINCED
In a TED talk last month, Musk claimed he didn’t worry about the deal’s economics at all while discussing it. As a result, the “economics” of Twitter is at best erratic. Late last month, the business announced quarterly user growth that exceeded expectations, but revenue fell short of expectations.
The general consensus among industry watchers is that Musk will fail. The average target price on Wall Street is a mere $51.88 a share, which is nearly 10% higher than current levels but still more than 4% below Tesla CEO Elon Musk’s $54.20 offer.
In addition, the company has a “hold” rating from 32 of the 36 analysts that monitor Twitter. Only two analysts rate Twitter’s stock as a “buy,” with the other two giving it a “sell” recommendation. If the wealthiest person in the world genuinely wants to purchase Twitter, it could be a bad idea to gamble against him. Although Twitter investors are confident in Musk’s ability to close the acquisition, experts aren’t.