A Merger Arbitrageur’s Take on Twitter and Musk – Not Over ‘Till It’s Over

There’s been a ton written already about the implications of Elon Musk pulling out of his Twitter deal.

It’s easy to do in retrospect, but the bigger question is… what happens next?

Nobody knows, of course, but my old friend Alan Greenberg (no relation), who has been betting on the outcome of takeovers as a risk arbitrageur for 25 years, has a thought or two.

He wrote most of this when there were merely rumors that Musk would pull out, but his bottom line hasn’t changed: That Musk might not have a leg to stand on in court.

He also thinks the fun may have just begun.

And note: Alan has no position in the stock, but I thought his comments were worth sharing – even thought the topic is so well saturated – because they give insight into how a merger arb might think this through…

<<My question: Did Transactional Musk Outwit Genius Musk?

The Musk vs Twitter Show has certainly become a worldwide phenomenon, which beams a spotlight on the art of merger arbitrage.

Never has the merger arena witnessed such a bizarre fact set and diabolical dispute over the veracity of prenuptial contractual considerations.

The ink had barely dried on the merger contract ink when Musk declared that the SEC- approved bot numbers – signed off by the Twitter CFO – may be factually incorrect by a magnitude of 4-times … or even 10-times.

If prospectively so erroneous, then a haunting question remains: Why did Genius Elon Musk hastily agree to a $44 billion transaction without a shred of due diligence?

And why did he do it in light of his historically critical commentary regarding the accuracy of Twitter’s holy grail metric, which is critical to Twitter’s attractiveness to advertisers?

Certainly Genius Musk checked off with Transactional Musk and his cabal of legal advisors, indemnified accountants, and skilled investment banking deal team before willfully executing the Merger contract.

Even so, if Genius Musk had conducted even cursory due diligence regarding the phantom bot issue, then his bot fraud claim would have been addressed and amply settled before a deal price and before the contract had been signed.

But what if Musk instead chose Twitter as a diversionary smokescreen…?

As a way to justify the sale of billions in dollars of Tesla stock, to fund SpaceX and then – by slight-of-hand – to use the imaginary bot trap door to parachute out the imaginary bot-leaking rocket ship called Twitter?

If that was his intention, then conducting real due real diligence would have left him little legal recourse to abandon the Twitter deal and land safely back to Earth.

My initial reaction upon the Twitter merger announcement was that the twisted nature of the fact set was smelling-salt audacious.

The negotiations were haphazard and fraught with more questions than answers.

Why, for example, was the $44 billion curiously over-capitalized with a massive injection of Musk equity? Of course! The Musk equity funds would be delivered from the sale and financing arrangements backed with his Tesla stock holdings.

We all admit Musk is rarely vanilla in his insider buy-and-sell tactics. And Genius Musk tends to gloat in his market misdirection, especially in the public and social arena.?

Initially, Musk promised his cultish Tesla shareholder base that the Twitter deal would prove minimal distraction from his Tesla day job obligations.

But in hindsight – given recent news from Tesla regarding employee layoffs, cash burn and rumored liquidity and China issues impacting Musk’s empire – it’s easy to wonder if Musk had bad faith motivations before entering the Twitter transaction.?

And thus, the question remains: Did Genius Musk concoct a scheme to divest billions of dollars in Tesla stock with the premeditated intention to terminate the Twitter Merger contract down the road by declaring “bot figure representation” fraud?

And if Genius Musk privately believed he had a secret exit door, did Transactional Musk ignore legal advice??

Or did he simply discard the “Specific Performance” clause in the definitive merger contract protecting the seller from a remorseful buyer – let alone a disingenuous one?

The Specific Performance clause seeks to counteract the very action Musk wishes the Twitter Board of Directors to entertain, a massive recut on the transaction or his contention he can walk away from the transaction for a $1 billion termination fee.

Ironically, this kind of ploy might have worked in prior merger cycles…

Unfortunately for him, Specific Performance is a relatively novel legal concept borne out of the 2008 LBO deal terminations and subsequent court cases.

It has since become a standard seller protection clause to avoid the very ploy it appears Musk might be trying to pull off.

More to the point: Specific Performance is inserted into merger contracts to preserve the seller’s right to force closure… or be awarded damages in excess of the agreed upon termination fee if the buyer is unwilling to fund or close the transaction. That’s assuming, of course, closing conditions as outlined in the merger agreement are satisfactorily met.

I argue the Twitter Board of Directors has ample economic incentive and precedent legal justification to successfully argue the merits of Specific Performance in front of the Delaware Chancery Court.?

Of course, specific deal risks remain especially when you enter hand-to-hand combat with the likes of Musk.

In my view, Twitter’s board has no choice but consider a deal recut. Among the reasons:

• Twitter’s discount of $35.04 (post-market close after Musk termination announcement) to the stated contractual deal price ($54.20).
• The remaining downside risk because of Twitter’s correlation to the technology sector and broader market slump… ?not to mention Musk’s assault on the intellectual assets of the Twitter franchise.
• The unwelcome time extension and legal risks associated with the Delaware Court case.

And if there is a recut…

It would be a win-win for shareholders if both sides agree on an appropriate discount to close the transaction and avoid the prospect of a negative binary outcome

From the perspective of a merger arbitrageur, a settlement would be welcome by merger arbs as well. And assuming the investment position is structured correctly –with options – it could prove highly profitable.

But if it does go to court….

From a legal perspective, a settlement would be a disappointment because contract law and Specific Performance would be on trial.

For the rest of us, the spectacle of a court case would no doubt be captivating and well worth the price of admission.>>

After all, this may be the first time that Genius Musk finds the Rule of Law does in fact apply… to him.