Twitter Nosedives After Musk Pumps Brakes on Deal

Twitter shares, which have been trading at a discount to Elon Musk's offer amid skepticism the deal will succeed, fell sharply on Friday morning after Musk put the deal "temporarily on hold."

Lukas Strobl 13 May, 2022 | 8:28AM
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Elon Musk squints

Twitter (TWTR) is set to dive at the U.S. open with pre-market indicators pointing to a 15% drop in price for the company, which would push shares below the US$39 price they were at just before Elon Musk had disclosed his initial 9% stake at the beginning of April. The world's richest man placed the US$44 billion deal on hold, citing doubts about the amount of spammers and bots on Twitter. He later added that he's still committed to the acquisition. 

Screenshot of Musk's tweet from May 13

The potential retreat isn't coming as a surprise to everyone. Throughout the biggest M&A saga of 2022, shares in the social network company never got close to Musk's US$54.20 offer level, reaching their narrowest discount of 5% at the end of April. By Thursday's close, the discount had already widened to 20%. By contrast, similar deals since 2005 had spreads of 2-4% a month after being announced, according to Pitchbook data. 

Meanwhile, Twitter's peers in the tech sector have been caught in a tailspin, raising concern that Musk may be over-spending.

Will Musk Still Buy Twitter?

High-profile skeptics of the deal include short seller Hindenburg, who described the offer level as too high on Monday. Disclosing a short position in the stock, Hindenburg cited a high risk that Musk will pay the US$1 billion break free or re-price the entire deal at a much lower level. Its founder Nate Anderson couldn't hold back his glee at Friday's news:

Nate Anderson's May 13 tweet
Anderson's indictment of Musk's plans included weak quarterlies and yet another admission that user numbers had been overstated. "As indicated by Musk, the platform is flooded with bots, spam, and scam accounts that likely inflate its genuine user metrics even further,'' Hindenburg wrote four days before Musk put his takeover on hold.

What is the Outlook for Twitter's Stock Price?

The short seller sees serious downside for Twitter's stock if Musk walks away. Selling pressure from Musk's promised stake sale if no takeover takes place, the wider Nasdaq's 17% slump since talks started, and Twitter's weak results means that if the deal fails shares could fall by as much as 50% in downside to Twitter stock, Hindenburg wrote in its letter. 

Musk's deal isn't off the table, but the road ahead is marked by uncertainty. Trading on the likelihood of a successful outcome, or merger arbitrage, is fraught with downside risk and only a few percent of upside potential, Morningstar's Chief U.S. Market Strategist Dave Sekera cautioned in a May 6 note.

"There's good reason for most people to leave this strategy to the professionals,'' he wrote. 

Not All Gloom

There may be a winner in Friday's setback to the Twitter takeover: Analysts have been warning that Musk is stretching himself too thin between his pursuits of an automotive revolution, a Mars colony, cyborgs and the world's definitive social network. Tesla (TSLA), down 36% since Musk disclosed his Twitter stake, was among the best-performing stocks in Friday's U.S. pre-market, pointing to a 7% jump at the cash open. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Tesla Inc171.05 USD-2.03Rating
Twitter Inc  

About Author

Lukas Strobl  is the editorial manager for EMEA at Morningstar.

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