Shares of the social media firm have fallen as a result of Elon Musk's effort to back out of his $44 billion acquisition of Twitter, leaving investors worried about the deal's future. It's yet more indication that he should not have attempted to acquire the business.
Late last week, the CEO of Tesla (ticker: TSLA) stated that he was ending the merger agreement with Twitter (TWTR), claiming that the latter had materially broken the terms of the agreement by misrepresenting the proportion of its users who are spam accounts. Twitter has made it plain that it would sue Musk to enforce the agreement.
The beginning of a drawn-out legal battle is imminent, and until then, Twitter stock prices are volatile. The stock has dropped roughly 15% since last week and was only slightly lower again in Tuesday's U.S. premarket. It is expected to open at around $32.60 per share, significantly below the $54.20 deal price.
Investors may not have anticipated a fairy tale conclusion when Elon Musk made his offer in April. But did the corporation ever think Musk was a good fit? Not in the opinion of DataTrek Research co-founders Nicholas Colas and Jessica Rabe.
As soon as the transaction was announced, the team at DataTrek poured cold water on the euphoria surrounding it, calling the social media company a "strange fit" for Musk and initially sending shares on Twitter rocketing upward.
In a note sent out on Tuesday, they repeated that stance. They argue that innovation comes in two flavors: disruptive and sustainable.
Musk has demonstrated he is very capable of the former, helping to launch an electric vehicle revolution while leading Tesla and co-founding the business that would become PayPal (PYPL) in the 1990s. More evidence for this may be found in his leadership of SpaceX, which grew to become the first commercially successful reusable rocket company, and Neuralink, which aims to integrate computers and human brains.
Colas and Rabe declared that Musk was "a master of disruptive innovation." The master of sustaining innovation, which is totally different, is what Twitter needs.
The team at DataTrek claims that Twitter already has a business. Twitter needs to improve and become more profitable by diversifying its offerings so that customers and advertisers will spend more.
"It is understandable how so many other senior managers fail to distinguish between disruptive and sustaining innovation if one of the century's most renowned business leaders can do it."
The Delaware Court of Chancery appears to have the final say, though.
Analysts believe Twitter has the advantage since it will be challenging for Musk to demonstrate that any false information regarding bots has a "substantial detrimental effect"—enough for him to leave—on Twitter's business.
"Under this theory, a buyer must demonstrate that the company's real business is significantly different from what it had committed to purchase. It is a tough standard that only a small minority of buyers who have changed their minds have ever successfully invoked, according to analysts at Guggenheim led by Michael Morris.
According to the Guggenheim team, corporate law specialists think that overall, Twitter appears to be on a more stable legal foundation than Musk.
"The bigger question is whether it is actually possible, if Twitter wins the case in court, to force the eccentric billionaire—known for defying convention even when doing so gets him into trouble—to purchase a business he does not want to own. Little precedent exists, according to the Guggenheim analysts.
Since tech markets have fallen much more precipitously since Musk made his bid, he might try to negotiate a different sale price for Twitter or pay a termination fee. However, analysts at Raymond James led by Aaron Kessler warned in a report that even buying his way out could be challenging.
While Mr. Musk might be willing to pay a termination fee to try to back out, doing so might be challenging because the termination fee was created to cover external reasons the deal couldn't be completed, such as the inability to obtain financing or regulatory reasons, according to Kessler's group.
Where does that leave the price of Twitter then? Based on a multiple of 12 times the anticipated adjusted earnings for 2023, Raymond James estimates a fair value of around $30 per share.
“Based on our bear/bull analysis, we estimate a standalone value for Twitter of $22-40/share,” Kessler and his group said. "At halfway, $30."
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