It seems like easy money on the surface. Twitter (TWTR) announced this week that it is set to be acquired for $54.20 a share. It's an all-cash deal, so the stock closing at $48.64 on Wednesday makes it seem as if this is an easy way to score an 11.4% gain by the time the transaction closes in a few months.
It's not easy money. A lot of things can happen between now and when Tesla CEO Elon Musk closes on the purchase of the social media giant. The ceiling may seem fairly obvious if the deal is completed as planned. It's time to start considering the floor.
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There's always a remote chance that someone jumps in with a higher offer, giving investors a shot at scoring more than an 11.4% return here. At this time it seems highly unlikely that other callers are assembling on the front porch on bended knee. It's been reported that Twitter's board explored rival offers, and obviously nothing bubbled up to the surface. It's been weeks since Musk floated the idea of acquiring the hotbed of short-form posts. The "speak now or forever hold your peace" moment came and went.
Twitter closed in the high $30s the day before Musk turned heads with the filing of his 9.2% stake. In theory, this would be the floor if a deal falls through. With the deal more likely to happen than come undone, it may seem as if an 11.4% gain is a lot more likely than a 20% decline from current levels to where it was on April 1. The floor actually has a trap door, and the basement could be lower -- and colder -- than you think.
Before heading down to the basement, let's consider all of the things that can derail this deal. Musk is a genius, but he's also fickle and mercurial. Did you see how quickly he quit on President Donald Trump's business advisory council in 2017? Remember how long you were able to buy a new Tesla with crypto last year? I probably don't have to jog your memory for you to recall how long he lasted on Twitter's board of directors last month.
Musk might move on. He may also post something so incendiary -- worse than body-shaming Bill Gates last week -- to unravel the transaction. In short, Musk may get bored of the board or the regulatory tide can turn on Musk.
If that's the case, the stock doesn't just reverse the last four weeks of gains. It doesn't go back to the April Fools' Day close of $39.31. There was a lot of helium in that price. Musk scooping up nearly a tenth of Twitter's shares outstanding leading up to the filing doesn't happen in a vacuum. There's also a bit of a buyout premium in Twitter's stock dating back to 2016 when a couple of blue chips were pondering plays on the platform before abandoning those plans. If no one stepped up in April to rival Musk's bid, the buyout premium in Twitter shares also needs to get aired out.
There's also the confidence rattler of the board just accepting Musk's initial offer. Usually companies will reject a proposal in the hopes of getting a sweetened bid. Twitter's board has to feel pretty grim about the platform's near-term outlook if it's not holding out for more. Twitter's move to cancel Thursday's earnings call -- merely offering up its uninspiring quarterly results -- is the kind of white flag surrender that will doom the social media stock if the transaction falls apart.
The market itself has also surrendered 8% of its value over the past four weeks. Market multiples for tech stocks have contracted. Do you still think an 11.4% return in a few months is easy money? It's not. There is no such thing as easy money.
