Elon Musk has agreed to pay $44 billion for Twitter, which is way more than it’s worth. His actions show he doesn’t want to pay that much – he still wants the company, just not at this price. So the big question in the markets is: will he end up buying the company, and if so, how much will he end up paying?
Why it matters: At stake is the future of one of the world’s most consequential social networks.
- And on a purely financial level, Twitter shareholders have a direct interest in how much they end up getting paid. On top of that, Tesla shareholders have an indirect but similarly large financial stake in what’s happening.
The big picture: Musk is contractually obligated to buy Twitter at the agreed price, and he can certainly afford to do so.
- Much attention has been paid to it the termination fee of $1 billion in the Short Form Merger Agreement. Fewer people have looked at the “specific performance” section of the long-term merger plan, which essentially says, “If you try to back out of this, we can take you to court in Delaware, and the court will compel you to buy the company.” agreed price.”
Between the lines: Such formulations are especially relevant in those cases where the buyer has the opportunity to pay in full. (Even if he has to sell a large chunk of Tesla stock to raise the funds.)
- The main precedent is IBP Inc. v Tyson Foods Inc, with Don Tyson of Tyson Foods in the role of Elon Musk. He attempted to back out of an agreed acquisition of IBP, but was forced by the Delaware Chancery Court in 2001 to buy the company anyway.
What’s next: Neither Musk nor Twitter want a lengthy court battle. Twitter may agree to a small discount on the agreed price just to close the deal.
- For example, after LVMH tried to pull out of its purchase of Tiffany early in the pandemic, that deal was struck at a 2.5% discount off the originally agreed price. A similar discount in this case would drop Twitter’s price from $54.20 to $52.80 per share.
- Alternatively, Musk could pay Twitter a hefty fee to get rid of his obligation to buy the company. For example, when Apollo backed out of its purchase of Huntsman in 2008, it paid a $1 billion severance payment — much more than the $325 million termination fee in the merger agreement.
The bottom line: “A separation fee is not an option for walking away,” says Mitu Gulati, a law professor at the University of Virginia. “Specific value propositions are very enforceable. Especially in Delaware.”