Home Technology Elon Musk can't simply stroll away from his Twitter deal by paying a $1 billion breakup payment

Elon Musk can't simply stroll away from his Twitter deal by paying a $1 billion breakup payment

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Elon Musk can't simply stroll away from his Twitter deal by paying a $1 billion breakup payment

Musk’s plan to purchase Twitter has apprehensive policymakers around the globe.

Joe Skipper | Reuters

Elon Musk cannot simply stroll away from his deal to amass Twitter by paying an agreed-upon $1 billion breakup payment. It’s not that easy.

Musk tweeted Friday that he has determined to place his acquisition of Twitter “on hold” as he researches whether or not the quantity of pretend/spam accounts on Twitter is definitely simply 5%, as the corporate has lengthy claimed.

He adopted that tweet with one other reiterating that he’s nonetheless dedicated to the acquisition.

But he dangers a lawsuit from Twitter for breach of contract that might value the world’s wealthiest individual many billions of {dollars}.

More than a breakup payment

Musk and Twitter agreed to a so-called reverse termination payment of $1 billion when the 2 sides reached a deal final month. Still, the breakup payment is not an choice cost that enables Musk to bail with out consequence.

A reverse breakup payment paid from a purchaser to a goal applies when there’s an out of doors motive a deal cannot shut, resembling regulatory intermediation or third-party financing considerations. A purchaser may stroll if there’s fraud, assuming the invention of incorrect info has a so-called “material adverse effect.” A market dip, like the present sell-off that has precipitated Twitter to lose greater than $9 billion in market cap, would not rely as a sound motive for Musk to chop free — breakup payment or no breakup payment — in response to a senior M&A lawyer accustomed to the matter.

If Musk had been to desert a bid just because he felt he overpaid, Twitter might sue him for billions in damages along with accumulating the $1 billion payment, the lawyer stated. This has occurred earlier than, resembling when Tiffany sued French luxurious items conglomerate LVMH in 2020 for attempting to again out of its agreed-upon deal. That go well with settled when Tiffany agreed to decrease its sale worth from $16.2 billion to roughly $15.8 billion.

Musk and traders might want a greater deal

Musk’s reasoning for placing a transaction on maintain could also be comparable: he would possibly need Twitter to decrease its sale worth. Twitter shares fell greater than 8% on Friday and are down about 23% from Musk’s agreed-upon buy worth of $54.20 per share. Part of the dip is expounded to an general hunch in expertise shares this month. The Nasdaq has fallen one other 11% for the reason that market shut on April 25, the day Twitter accepted Musk’s provide.

“This is probably a negotiation tactic on behalf of Elon,” Toni Sacconaghi, Bernstein senior analysis analyst, stated Friday on CNBC’s “Squawk Box.” “The market has come down a lot. He’s probably using the guise of true active users as a negotiation ploy.”

Musk might really feel some stress or obligation to different potential traders in Twitter to decrease the worth, even when the world’s wealthiest individual is extra worth agnostic.

Musk is in talks with outdoors traders for each fairness and most well-liked financing to minimize his private stake in Twitter. If he can get a lower cost for the social media firm, the returns could possibly be larger for out of doors traders if and when Twitter returns to public possession or is resold.

Why he might nonetheless attempt to bail

Though he stated he remained dedicated to purchasing Twitter, Musk could also be tempted to throw within the towel given the losses he is incurring on paper with regard to his Tesla fairness possession. Shares of Tesla are down about 24% over the past month.

If Musk believes his Tesla losses are associated to his Twitter acquisition and are important sufficient to probably outweigh each the $1 billion termination payment and any further damages he could be charged in court docket if he loses, he might determine strolling away made sense.

But he’d additionally need to cope with the reputational injury related to breaking a deal. It’s unclear any future firm would danger promoting to Musk with that monitor report.

Musk was not instantly obtainable to remark.

Twitter might must renegotiate

Just as Tiffany and LVMH ultimately settled, Twitter might not have many good choices outdoors of renegotiating with Musk. The firm probably would wish to keep away from an costly protracted lawsuit. Employees might flee as the corporate would not have a transparent future plan. Twitter’s already reducing prices. On Thursday it dismissed two executives and stated it is placing hiring on maintain.

When Twitter agreed to promote itself to Musk for $54.20, the board did not trouble pushing for a better worth partially as a result of there have been no different patrons at that worth. Twitter’s board got here to the conclusion it wasn’t prone to quickly return to buying and selling at larger ranges given this yr’s valuation decline in peer shares resembling Facebook and Snap.

Twitter’s finest consequence may be to just accept a decrease provide from Musk.

A spokesperson for Twitter wasn’t instantly obtainable to remark.

WATCH: Elon Musk says he is “still committed” to Twitter acquisition

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