If musk really chooses to give up the acquisition of twitter, he will face not only a simple $1 billion breakup fee, but also a default lawsuit from twitter, which may cost him billions of dollars. "Suspending the transaction" may be just a prelude to Musk's desire to restart negotiations and complete the acquisition at a lower price.
Before the trading of US stocks on Friday, May 13, Musk's tweet of "transaction suspension" aroused thousands of waves, which led to several tweets from twitter CEO Parag Agrawal, saying that "the transaction with musk is expected to be completed smoothly, but it is also well prepared for the future."
Since taking a stake in twitter on April 4, musk has shown his previous determination to acquire. Even though twitter once refused to be acquired and launched the "poison pill plan", musk still hopes to impress the twitter board through its strong financing ability. Under the pressure of shareholders, Twitter's board of directors finally agreed to Musk's $44 billion offer.
Dan ives, an analyst at us brokerage wedbush, said earlier:
Musk's announcement to suspend the acquisition of Twitter is like a "circus show" and may eventually turn into a "horror show". This may lead to three potential outcomes: transaction failure; Musk lowered the purchase price; Musk withdrew from the deal and paid a $1 billion breakup fee.
But in fact, if musk really chooses to give up the acquisition of twitter, he will face not only a simple $1 billion breakup fee, but also a default lawsuit from twitter, which may cost him billions of dollars.
A firm $1 billion breakup fee
At the end of April, a document from the securities and Exchange Commission and the SEC showed that in some cases, musk may be required to pay a $1 billion termination fee to twitter. For example, if musk cannot get enough debt financing to complete the $44 billion acquisition of twitter.
As mentioned above, if the obligations of the parent company (the special company created by musk for the acquisition) and the acquired subsidiaries to complete the merger are met, and the parent company fails to complete the merger in accordance with the requirements of the merger agreement, including the non financing of equity, debt and / or margin loan financing, the company will be required to pay a termination fee of US $1 billion to twitter.
The document also shows that if twitter finds a competitive offer or shareholders reject the transaction, twitter will pay musk a $1 billion breakup fee.
Don't forget there are lawsuits for breach of contract
In addition to the $1 billion breakup fee, musk also faces the risk of being sued by twitter for breach of contract, which could cost the billionaire billions of dollars.
According to a senior M & a lawyer familiar with the matter, the current sell-off that has led to a loss of more than $9 billion in Twitter's market value will not be a valid reason for musk to give up, whether there is a breakup fee or not.
If musk abandons the bid simply because he thinks he paid too much, twitter can sue him for billions of dollars in compensation in addition to charging $1 billion. This has happened before. For example, in 2020, Tiffany sued LVMH, a French luxury group, for trying to exit the agreed deal. The lawsuit was settled when Tiffany agreed to reduce its sale price from $16.2 billion to about $15.8 billion.
In 2019, LVMH announced that it would acquire Tiffany; In September 2020, due to the huge impact caused by the epidemic, LVMH once decided to stop acquiring Tiffany; However, Tiffany has filed a lawsuit to enforce the acquisition agreement, alleging that LVMH group deliberately delayed the transaction, while LVMH counterclaimed that Tiffany was mismanaged during the epidemic crisis. The following month, the two sides reached a new agreement on the purchase price from $135 per share to $131.5.
In addition to the $7.5 billion acquisition of Boston Medical Technologies, medchannel tried to abandon its $2.5 billion lawsuit against the company. In 2019, the judge ruled that the transaction should be completed, and Boston science paid a settlement to channel medsystems, but the specific amount was not disclosed.
Acquirers seeking to exit transactions sometimes use the "material adverse effect" clause in the merger agreement to argue that the target company has been seriously damaged. However, like many recent M & A transactions, the wording in the twitter transaction agreement does not allow musk to exit due to the deterioration of the business environment, such as the decline of advertising demand or the sharp decline of twitter share price. Musk said the move had made it "as difficult as possible" for him to accept Twitter's offer in court, which prompted him to give up his right to conduct due diligence as much as possible.
What is Musk's intention to renegotiate
The day after Twitter's board of directors announced its agreement to sell the company to musk for $44 billion, Tesla's market value evaporated by $100 billion; Later, twitter admitted that it had been exaggerating the number of users because of "mistakes" for three years when it was less than expected to release its first quarter earnings; Recently, musk has made frequent moves to raise money. Wall street news mentioned that after finding a new "golden father" to add $7.1 billion last week, the source said musk began to seek up to $6 billion in preferred stock financing.
So, musk, who once vowed to win, really wants to withdraw from the acquisition under the pretext of "garbage account problem"? Foreign media reported that musk may want to try to renegotiate and complete the acquisition at a lower price.
The article on Wall Street mentioned earlier that Hindenburg research, a short agency, had speculated that musk might try to restart negotiations to lower the transaction price before the transaction was completed.
Toni sacconaghi, senior research analyst at Bernstein, explained:
This may be a negotiation strategy on behalf of musk. The market (twitter market value) has declined a lot. He may be using the guise of real active users as a negotiation strategy.
Although musk has said that he did not buy twitter to make money, many investors believe that Tesla's share price has fallen by 27% since he revealed his stake in twitter, in part because of concerns that he may have to sell more shares. Therefore, if musk can negotiate to buy twitter at a lower price, Tesla shares will face less pressure. If co investors start to worry about overpaying, they may pressure him to renegotiate.
It is worth noting that, affected by the acquisition of twitter, Musk's Tesla has fallen by about 24% in the past month. If musk believes that Tesla's loss is related to his twitter acquisition, and the amount is huge enough to exceed $1 billion in breakup fees and other losses he may be charged in court, then it makes sense for him to decide to end the acquisition. But he must also face reputational losses associated with damaging the deal.