Even the richest person in the world makes a few mistakes. Similar to being in the markets, sometimes it is better to cut your losses and move on than to add on to a losing position.
Unfortunately for Elon Musk and his wayward attempt to purchase Twitter Inc TWTR, there is no easy way out that is not going to be extremely costly.
This article lays out some reasons why it may be better for him (and Tesla shareholders) to walk away from the deal and pay the piper.
Twitter Is Broken And Not Fixable: The platform has turned out to be a cesspool of propaganda for anonymous entities.
Naive Americans are already willing to forget about the Russian bots that were discovered attempting to influence the outcome of the 2016 election.
Twitter, with its allowance of anonymity, cannot possibly make any claims about being a legitimate source of information or discourse.
Why would a successful business person such as Musk want to associate himself with internet deceit and manipulation? To become a champion of Twitter could have a poor reflection on Musk’s otherwise innovative and prudent enterprises.
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Musk Overpaid: Whether it was just bad timing or bad advice, Musk way overpaid for the depreciating asset. Social media platforms have been one of the hardest-hit sectors in the ongoing bear market.
The S&P 500 has fallen roughly 20% on a comparative basis since the deal was first announced in April.
For example, Meta Platforms Inc META, the company behind Instagram and Facebook, is off by 42%. That feels like a winning position compared to Snap Inc SNAP, which has swooned 71%,
Keep in mind those dreaded figures are from April 1 levels that were not even close to the respective all-time high in each issue.
Tesla has not sniffed on a closing basis the price it made when the Twitter deal was announced on April 1.
Although it did rally the Monday following the announcement, closing at $381.82, it has been under extreme selling pressure. To make matters worse, much of the selling pressure has come from Musk himself as he attempts to get financing for his ill-timed and poorly thought-out Twitter purchase.
It should be noted that other factors have weighed on Tesla as well. With the issue being a major component of the S&P 500 index, it is subject to the whims of the overall market.
At $223, Tesla has shed nearly 40% since April, which far exceeds the S&P 500's decline since that date.
Bankers Get Cold Feet: While Musk has attempted to finance the deal with his own funds, he has been seeking help from the Street, putting up his Tesla stock as collateral.
Somehow that does not seem like a good idea: to be beholden to Wall Street for a fantastic company that has transformed the automotive industry.
At this point, the banks financing the deal may be saddled with heavy losses if the deal goes through at $54.20 for two reasons. First of all, rates have dramatically increased and the funds lent to Musk at lower levels could have been deployed elsewhere.
The equity in the asset has diminished so much, there is no way a resale of the company in this market environment would fetch such a lofty valuation.
As a result of the aforementioned circumstances, Apollo Global Management APO and Sixth Street Partners, which had been considering financing for Elon Musk's proposed $44-billion buyout of Twitter, are longer interested in being involved in the deal.
Why $1B Hit Would Be A Win: Under the original terms of the deal, Musk is committed to paying the company $1 billion if he reneges. Yet if Musk walks away from buying Twitter, the social media company can sue him for breach of contract. Under the letter of the law, a buyer can’t withdraw from a deal by paying a fee unless certain conditions apply.
In reality, it could be much more than that, as Twitter has “lawyered up” in the corporation-friendly state of Delaware and will press for damages that far exceed that number.
Many have speculated that Musk’s recent posturing may be his way to get a lower price on Twitter.
Tough Call: When you are worth over $200 billion, taking a hit of $1 billion or even more may be unsettling. Yet Musk has to consider he is paying $44 billion for an asset that no one else wants and putting part of his fortune in Tesla and other companies at risk.
On the other hand, as brilliant as he is, Musk just may have a plan to turn the company around in a robust bear market and turn it into another profitable business venture.
In this rapidly changing world of social media, no investment in any of these companies is a good one. Especially in one that has a valuation that by no means can be justified under today's market conditions.
The author of this article has no position in Twitter.
Photos by Ljupco Smokovski on Shutterstock and via Wikimedia Commons.
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