elon musk
Home Finance Why Elon Musk Can’t Get Out of the Twitter Acquisition Deal
Finance - July 16, 2022

Why Elon Musk Can’t Get Out of the Twitter Acquisition Deal

Elon Musk made a pitch to improve Twitter when he decided to purchase the company in April for $44 billion. He promised to offer new services, stop spam bots, and be more open about the algorithms used by the company.

A group of banks agreed to lend him more than half the total purchase price to buy the company once he received their approval.

But now Musk wants out, citing Twitter’s failure to provide him with additional information and what he perceives as the company’s deteriorating commercial prospects as his reasons. Twitter is suing him to finalise the agreement, claiming that his justifications for quitting are just pretexts for breaking a financial agreement he no longer wants to honour. Meanwhile, his financial backers remain helpless.

Twitter claims that by signing a deal with Musk, it is evident that he must take all the necessary steps to complete the project. Legal experts claim that the banks that agreed to lend Musk billions of dollars to help him purchase Twitter signed contracts prohibiting them from just walking away even if they changed their minds.

“They’ve signed commitment letters, so they’re essentially committed,” said Adam Badawi, a law professor at the University of California at Berkeley. The banks have reputations to uphold, too. “Other companies wouldn’t want to work with them if they reneged,” he said.

RELATED:

5 Companies Elon Musk Can Buy

Elon Musk’s debt play

The Bloomberg Billionaire Index values Musk as the richest person in the world at $218 billion, but even he doesn’t have $44 billion in cold, hard cash stashed under his mattress. 

In order to borrow a total of $25.5 billion, he made two agreements with banks like Morgan Stanley, Bank of America, and Barclays. He pledged a sizable portion of his own wealth in the form of Tesla shares as security in case he could not repay the loans. 

Musk and a group of hedge funds and sovereign wealth funds eventually agreed to help him buy the business and would become co-owners if the sale was successful. The remaining funds were to be funded with cash.

Will the banks bail out?

Many people don’t think Twitter will be successful in getting a court to force Musk’s hand, and the banks are only responsible for financing the purchase if it closes. 

According to Carl Tobias, a law professor at the University of Richmond, a more likely scenario is that the judge in Delaware Chancery Court, where the trial will take place, will force a compromise, forcing Musk to pay Twitter a sizable fine for causing it so much trouble, but will let him walk away in the end.

In that event, Musk will still pay the banks a nominal fee for their services, but they are no longer obligated to give him any loans. 

Additionally, they may be staying with Musk for the time being because they don’t want to alienate him by claiming that he is acting dishonestly.

Regardless of how the Twitter situation plays out, Tobias predicted that Elon Musk, who is still the richest man in the world, will require a lot of debt funding in the future. “You want to keep his business if you’re a bank because I think it’s pretty lucrative,” he said.

Why does Twitter still want to go through with the deal?

The primary responsibility of the Twitter board is to serve its stockholders, which include banks, pension funds, hedge funds, and private investors. 

Shares of Twitter are currently selling for about $36, which is considerably less than the $54 per share Musk has promised to pay those owners to acquire the business. The board of Twitter would be leaving money on the table and opening themselves up to shareholder litigation if Musk were allowed to leave.

The entire incident has negatively impacted the company’s brand and employee morale, with Musk’s criticisms escalating pre-existing worries about its operations. If Musk entirely departs from the company, the stock price is probably going to fall even further.

Many Twitter users and staff members oppose selling the firm to Musk, whose prior businesses have come under fire for how they treat their staff members.

Ev Williams, one of Twitter’s co-founders, claimed that if he were still on the board, he would “be asking if we can just let this whole ugly episode blow over.”

NEXT:

How Elon Musk’s StarLink will disrupt Africa’s telecom

Leave a Reply

Check Also

How Nigerian Singer Sammie Okposo Died

Sammie Okposo, a leading Nigerian gospel performer, passed away early on Friday, the 25th …