One weird aspect of Musk’s quasi-terminated deal to buy Twitter is that he owns 9.6% of Twitter’s stock. Or, at least, he owned 9.6% of the stock as of Friday. On Friday he sent Twitter a letter purporting to terminate the merger agreement. The merger agreement includes a provision (section 6.2(d)) requiring Musk not to sell any of his shares before Twitter’s shareholder vote on the merger, but if Musk really believes that he has terminated the merger agreement (risky!) then I suppose he can sell the shares, and honestly it would be hilarious if he did. If he does sell any shares, he would have to disclose that “promptly,” which presumably means within a day or so. Is it possible that he started dumping his stock yesterday, and will disclose that this afternoon? I suppose it is technically possible, and would be amazing. (Is it possible that he started dumping his stock yesterday and will file the report late? That is also possible!)
Assuming, though, that he still owns 73.1 million shares of Twitter, and that he does not want to sell those shares before a court decides if the deal is off or not, then those shares are an interesting bargaining chip for a settlement. Musk paid about $2.6 billion for those 73.1 million shares, an average price of about $36.16 per share. The stock closed yesterday at $32.65, making his stake worth about $2.4 billion, for a loss of about $250 million.
If Musk and Twitter fight to the death over this deal, and Musk wins in court and is able to get out of the deal for a $1 billion (or zero!) breakup fee, then the stock will go down a lot. If he waits until then to sell, then he might clear, I dunno, $25 per share, for a loss of about $800 million. Meanwhile Musk’s own selling will push down the stock, which will be embarrassing for Twitter, which in this scenario will want to save face and preserve a shred of shareholder value. Musk will not want to sell his stock into the market, but he will not want to hold it; Twitter will not want him to sell his stock into the market, but will not want him as a shareholder.
So there is some compromise where Twitter buys the stock directly from Musk at — I don’t know, $26? — and Musk and Twitter are both better off than he would be if he dumped the stock into the market.
Now, this trade doesn’t really work on its own. (Twitter can’t really buy stock from Musk at a premium.) But the trick is to combine it with a broader settlement. The deal is like:
- Musk hands all his stock over to Twitter.
- Twitter pays Musk $0 for the stock.
- Maybe Musk pays Twitter $X in cash, where X could be positive or zero or I guess even negative.
- Twitter says “Musk paid us [$X in cash plus] $2.6 billion worth of stock, measured by his purchase price,” even though the stock is only worth $1.8 billion or whatever as of the time he hands it over. (Or “Musk paid us $4 billion worth of stock, measured by the $54.20 deal price,” why not?)
Twitter gets a face-saving headline settlement amount, gets rid of Musk, and doesn’t have him dumping his stock in the market to depress the stock; Musk gets to pay that settlement amount in discounted currency and gets out of the stock without pushing down the price.