September 22, 2022

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When Elon Musk announced his intention to buy Twitter almost 90 days ago, the world — and financial markets — looked different.


The S&P 500 was 14 per cent higher and had yet to enter a bear market. The war in Ukraine and inflation concerns had pushed investors into selling mode, but sentiment hadn’t collapsed. And Tesla, the electric carmaker that’s the main source of Musk’s wealth, was about to announce record profits.


Wall Street and Corporate America’s mood has changed since then. US stocks just closed out their worst start to the year since 1970. Tesla has started laying off workers after Musk indicated he had a “super bad feeling” about the economy. The second half of the year looks uncertain at best.


In this climate, Musk’s offer to pay US$44 billion for Twitter, scooping up the shares he doesn’t own for US$54.20 a piece, seems way too high — and now, unsurprisingly, he wants out.


“The market dramatically changed since April,” Daniel Ives, a strategist at Wedbush Securities, told me.


Musk took steps late on Friday to terminate his deal to buy Twitter, claiming the company is “in material breach of multiple provisions” of the original agreement.


For weeks, Musk has expressed concerns, without any apparent evidence, that there are a greater number of bots and spam accounts on the platform than Twitter has said publicly. Analysts speculated that the fight was an attempt to create a pretext to get out of a deal that now appeared overpriced.


Musk’s offer represented a 54 per cent premium over Twitter’s price before Musk started building up his stake in late January, and a 38 per cent premium before his holdings were revealed in April.


At the beginning of July, Twitter shares were trading at just US$38.23, down almost 12 per cent since the start of the year and nearly 30 per cent below Musk’s offer price.


On the radar: Twitter shares would probably be doing way worse if Musk hadn’t made his play. Investors have been ditching fast-growing tech stocks — which are less attractive when interest rates are rising — and social media companies have been hit hard.


Facebook’s Meta has seen its shares plunge almost 50 per cent year-to-date. Snapchat is 68 per cent lower.


Then there’s Tesla stock, which Musk was planning to rely on in part to finance the deal. It’s also declined sharply, plummeting 30 per cent since the beginning of April.


“The Twitter fiasco had a major overhang on Tesla’s stock and that is Musk’s golden child,” Ives said.


Musk isn’t calling his fickleness buyer’s remorse. But Ives think it’s clear that was a major factor.


What happens next: The stage is set for a lengthy and dramatic legal battle. Twitter has said it intends to force Musk to close the sale — and it’s not hard to see why. Twitter’s stock is down more than 5 per cent in premarket trading on Monday. With the takeover tied up in court, Ives thinks it could drop another 30 per cent to US$25.

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