The Elon Musk-Twitter (TWTR +0.00%) saga so far has been the stuff you'd watch with a tub of popcorn, but the latest twist to the story should make you sit up and take notice, whether you're a shareholder in Tesla (TSLA 2.47%), Twitter, or both.
Musk has just accused Twitter of a "material breach" of its obligations under the merger agreement signed on April 25, reminding the social media platform's chief legal officer that Musk retains the right to terminate the agreement. In other words, he has threatened to walk away from his deal with Twitter.
The Twitter breach that's infuriated Musk
Musk offered to take Twitter private by buying all of its outstanding shares at a price of $54.20 per share, translating into a premium of roughly 38% from Twitter's closing price on April 1, also the last trading day before which he publicly disclosed his 9% stake in Twitter. On April 25, Twitter's board of directors unanimously agreed to the merger and signed an agreement with Musk, with both Twitter and Musk reserving the right to terminate the agreement under certain circumstances.
On May 13, though, Musk tweeted that the deal was put on hold as he sought details about Twitter's spam and fake accounts and evidence that they represented "fewer than 5%" of the social media company's 229 million monetizable daily active users in the first quarter as it claimed.
He has now refuted Twitter's response to his request for the data and believes the circumstance even warrants calling off the deal.
Image source: Getty Images.
His lawyers stated in a letter dated June 6 that, as Twitter's prospective owner, Musk has the right to have a complete picture of Twitter's business model, particularly its active user base, and that he now suspects Twitter of withholding the data in fear of what his own analysis could uncover.
Without mincing any words, Musk's lawyers said that he "does not understand" Twitter's reluctance to allow him to independently evaluate spam estimates and believes the company is not only thwarting his right to information but also failing to meet its obligations under the merger agreement. This is a breach that Musk says gives him the right to end the deal.
So is the Musk-Twitter deal now all but over?
It's difficult to say at this point. The thing is, Musk didn't pursue Twitter to add value to any of his businesses, whether it's Tesla, SpaceX, The Boring Company, or others. Instead, he wants to transform Twitter into a platform for free speech by decreasing the amount of moderation on the site.
A termination won't come easy. Twitter will defend its stand as it'll have to shell out $1 billion to Musk if the deal is called off on charges of a breach. He could also drag Twitter to court as his concern about fake accounts isn't entirely unwarranted. Musk, on the other hand, may have to prove the breach in court, failing which he will have to pay Twitter a $1 billion termination fee and could even be sued for additional damages.
With so many ifs and buts involved, there's a chance Musk may now try to renegotiate the terms of the deal and seek a lower buyout price, especially given the sharp fall in Twitter shares in recent months -- the stock is trading just above $39 per share. Perhaps he also doesn't find Twitter as attractive or worth his time anymore, now that he also sees challenges ahead for Tesla.
Good news ahead for Tesla and Twitter shareholders?
Tesla shareholders have felt the fallout of Musk's interest in Twitter, with shares of the electric vehicle (EV) leader plunging recent weeks.
NASDAQ: TSLA
Key Data Points
To be sure, it started with Twitter, but Tesla investors have had other reasons to worry as well. Growth stocks took a hit and so did Tesla; and just days ago, Musk said he has a "super bad feeling" about the economy and that Tesla will lay off 10% of its salaried workforce. Musk, though, later clarified via a tweet that he still expects total headcount to increase this year, particularly those of primary workers who are directly involved in its manufacturing process.
If anything at all, that means Musk continues to expect strong demand and should stick with his aggressive expansion plans, especially in China, as Tesla ramps up production in the world's largest EV market. For that matter, Tesla's first quarter was a blowout: It delivered a record number of EVs, grew its revenue by 81% year over year, and generated a solid operating margin of 19.2%, up substantially both year over year and sequentially.
Given the backdrop, Tesla shareholders should be happy if Musk bails out on Twitter as it'll remove one (unnecessary) overhang from the stock's price.
Twitter shareholders, on the other hand, may miss getting a sizable premium if the deal doesn't go through, and chances are Musk could even dump his shares in Twitter. Yet, they might still be better off in the long term.
