How many billions will Elon Musk’s Twitter mistake cost?

Elon Musk Twitter deal cost billion how many SEC
Twitter has taken legal action asking Elon Musk to complete the merger at the agreed bid price of US$54.20 per Twitter share.

What do you do with a guy like Elon Musk?

On the one hand, you have got to acknowledge that he is a business visionary – someone who saw the electric car revolution very early and rode it better than anyone and has also ridden some unlikely trends including space-borne internet and fast transport tunnels.

On the other hand, he is apt to fly off the handle, which has already landed him in heaps of trouble.

The best example was his fight with the US Securities and Exchange Commission (SEC) in 2018 when he tweeted about his plans to take his electric car company Tesla private when that was more of a thought bubble than an actual plan.

At the end of that disaster Tesla had to pay a US$40 million fine and Mr Musk was forced to step down as Tesla chairman.

At that time Mr Musk was hardly the humble and apologetic miscreant – more like a defiant schoolboy who continued to snub his nose at authority and tweet whatever he felt like – even to the point of publicly smoking a joint during an interview.

The $65 billion question

Interestingly, the acid test of what Elon Musk can get away with will be answered by Twitter – or, more accurately, through the US$44 billion (A$65 billion) bid for Twitter that Mr Musk is now furiously trying to wriggle out of.

In pure business terms, Mr Musk’s bid for Twitter is one of the most poorly timed acquisitions of all time – right up there with “young” Warwick Fairfax’s $2.25 billion privatisation bid for the Fairfax media company just before the 1987 share market crash.

The lesson from the Fairfax privatisation, which destroyed “young” Warwick’s fortune and eventually sent the media company into receivership, is that when you do a deal at a really lofty valuation and the market changes from frothy to dire, you really need to try to get out of it.

Mr Musk is smart enough to know that and he doesn’t want to be stuck with this acquisition that seriously threatens his wealth – even if it means he won’t own what he called “the de facto public town square”.

Can Musk wriggle out of the deal?

His attempts to wriggle out of the deal since the massive downturn in the valuation of technology shares has been creative and played out in public but whether he will eventually be able to get off the hook will be a matter for the courts and the regulators.

Already Twitter has taken legal action asking Mr Musk to complete the merger at the agreed bid price of US$54.20 (A$79.57) per Twitter share.

Not for them to be swayed by an argument that Twitter has failed to provide enough information on the amount of spam accounts on its service.

There is a lot riding on who wins this battle – not least for the many Twitter shareholders who were initially concerned that Mr Musk bought some of their shares cheaply before making the bid public and later, by trying to wriggle out of paying his agreed bid price.

Musk created a lot of his own problems

There are many problems for Mr Musk in trying to get out of paying up for the bid – most of them of his own making.

The biggest is that he waived his rights to conduct due diligence or any investigation of Twitter’s business and finances.

He also agreed to pay a US$1 billion (A$1.47 million) break fee – something that at this stage would be a very cheap “get out of jail” fee for Mr Musk, although there are strict limitations as to how it would apply.

The SEC has already begun an investigation into Mr Musk’s actions in April, when the billionaire became Twitter’s largest shareholder.

Mr Musk filed a securities document at the time indicating that his investment would be passive and that he did not intend to seek control of the company.

However, 10 days later he began aggressively buying Twitter shares from people who were unaware the company was in play.

The SEC are now inquiring as to whether Mr Musk really was a passive investor and whether he disclosed his stake in the company at the right time.

US Securities law requires shareholders who buy more than 5% of a company’s shares to disclose their ownership within 10 days of reaching that threshold.

However, in his regulatory filings, Mr Musk has said he crossed that threshold on 14 March but did not make his purchases public until 4 April.

SEC inquiry is widening to trap Musk

This inquiry is quite separate to Twitter’s efforts to try to enforce Mr Musk’s deal to purchase the company, although the SEC has now widened its inquiry into Mr Musk’s tweet in which he was asking about fake accounts on Twitter without filing any documents saying he might pull out of his bid for the company.

If Mr Musk is forced to continue with the purchase at the original price it will cost him the loss of at least US$15 billion (A$22 billion) of his fortune and possibly much more.

That is because the exquisitely bad timing of the offer means he is not only significantly overpaying for Twitter but will need to put many more Tesla shares up as security, given that they have slumped by more than a third since the bid was made.

Another issue of Mr Musk’s own making is that not only did he sign a deal with very few escape clauses, he declared after making it back in April that: “I don’t care about the economics at all.”

Musk suddenly does care about economics

Now it seems clear that he really does care about those economics but the US legal commentators generally don’t see many options than for Mr Musk to push ahead with the bid at the original price – much as “young” Warwick Fairfax did so many years ago.

It is possible the Twitter board might be persuaded to accept a lower price – although highly unlikely – but at this stage Mr Musk seems determined to press ahead with his attempts to wriggle out of the Twitter deal at all costs.

For a guy who has long proved the haters wrong in pulling off nearly impossible achievements, Mr Musk will no doubt relish another chance to prove everybody wrong.

However, at this stage, it looks like he could end up ensnared in expensive court and regulatory actions for a very long time and still have a massive financial deal ahead of him, that will tie up a lot more Tesla shares than he bargained for.

After all, when Twitter’s chairman took action against Mr Musk he did it in a real court – not on his own social media platform – with the aim of the lawsuit to hold Mr Musk “accountable to his contractual obligations”.

    Join Small Caps News

    Get notified of the latest news, interviews and stock alerts.