Walking Away From Twitter Deal May Not Be An Option For Musk: Merger Expert On What's Next

Zinger Key Points
  • Only one merger agreement in history has been terminated due to a material adverse effect.
  • A more likely scenario than heading to court is Musk offering a lower buyout price than the previously agreed upon $54.20.

Elon Musk disclosed last Friday after market close that he was terminating his agreement to acquire social media platform Twitter Inc TWTR. With shares of Twitter falling on Monday, Benzinga asked a merger expert what happens next and if the Tesla Inc TSLA CEO can truly walk away from his definitive agreement.

Merger Terminated: Musk announced he was terminating the merger with Twitter due to the company breaching the agreement and a material adverse effect.

“I don’t consider this an option for him walking away,” Accelerate’s Julian Klymochko told Benzinga. “He can claim he is terminating the merger agreement, however, it is extremely likely that the Board of Directors of Twitter will disagree with the purported termination and sue for specific performance.”

Klymochko, who estimates that he has invested in/analyzed over 2,500 mergers over the last 15 years, told Benzinga previously that Musk can not walk away from the deal.

What Past History Says: Klymochko pointed to past history showing that Musk’s case for a material adverse effect is unlikely to succeed.

“Terminating a merger deal based on a MAE is extremely difficult, and has only happened once in history (Acorn v. Fresenius). This successful MAE-based merger termination occurred after the target’s business completely fell apart,” Klymochko said.

Twitter’s financial performance has not suffered material setbacks since the deal was announced, Klymochko said.

Klymochko highlighted an acquisition between Simon Property Group SPG and Taubman Centers.

“Simon tried to terminate the deal, claiming a MAE, and Taubman sued to enforce the agreement. The parties settled with an 18% price concession right before the trial started, and the deal went on to close at the lower price.”

Klymochko points out several other case studies in a Twitter thread and told Benzinga that litigated deals often close at a lower negotiated price.

“Trials can go either way, and the acquirer could be forced to close or owe damages well in excess of the reverse break fee.”

Related Link: Exclusive: Arbitrage Expert Julian Klymochko Explains Why Warren Buffett Is Buying Activision Blizzard 

What’s Next: Based on past history of acquirers claiming MAE, Musk could come in with a lower price per share offer than the originally agreed upon $54.20.

“Musk closing the Twitter acquisition at a reduced price is the most likely scenario, given a trial will be highly uncertain for both parties,” Klymochko said. “The market has always heavily discounted the probability of this deal closing on the original terms, as indicated by the large discount to $54.20 that Twitter stock has traded at consistently.”

If a deal is not reached prior to court, it will be up to a judge to decide if Twitter breached the merger agreement or suffered a MAE, which would allow Musk to terminate the deal without penalty.

Twitter said in a press release that they were confident they can prevail in the Delaware Court of Chancery.

“We are committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plan to pursue legal action to enforce the merger agreement,” the company said.

Twitter Chairman Bret Taylor shared the same sentiment with a tweet last Friday.

DWAC Effect: Elsewhere, shares of the SPAC taking free speech social media platform Truth Social public spiked on news of Musk pulling his Twitter offer. Digital World Acquisition Corp DWAC is bringing Truth Social parent Trump Media & Technology Group public via SPAC merger.

Musk previously said he would unban former President Donald Trump from Twitter and said he believed in free speech on the social media platform.

Musk not controlling Twitter could be a win for Truth Social in keeping Trump and other banned accounts on the platform without the ability to return to Twitter.

Klymochko isn’t too confident this is a win for Digital World.

“The Twitter deal situation should have no effect on DWAC,” Klymochko said. “In fact, I believe DWAC will likely not close on the Trump Media deal, given lack of progress with the proxy filing and the several subpoenas that the firm has received.”

TWTR Price Action: Twitter shares were down 7.20% at $34.13 on Monday, according to Benzinga Pro.

Photo: Created with an image from Daniel Oberhaus on Flickr

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