Elon Musk can't just walk away from his Twitter deal by paying a $1 billion breakup fee

Elon Musk cannot simply stroll away from his deal to amass Twitter by paying an agreed-upon $1 billion breakup price. It is not that easy.

Musk tweeted Friday that he has determined to place his acquisition of Twitter “on maintain” as he researches whether or not the quantity of pretend/spam accounts on Twitter is definitely simply 5%, as the corporate has lengthy claimed.

He adopted that tweet with one other reiterating that he’s nonetheless dedicated to the acquisition.

However he dangers a lawsuit from Twitter for breach of contract that might price the world’s wealthiest particular person many billions of {dollars}.

Musk and Twitter agreed to a so-called reverse termination price of $1 billion when the 2 sides reached a deal final month. Nonetheless, the breakup price is not an choice cost that permits Musk to bail with out consequence.

A reverse breakup price paid from a purchaser to a goal applies when there’s an outdoor motive a deal cannot shut, resembling regulatory intermediation or third-party financing considerations. A purchaser may stroll if there’s fraud, assuming the invention of incorrect data has a so-called “materials hostile impact.” A market dip, like the present sell-off that has triggered Twitter to lose greater than $9 billion in market cap, would not rely as a sound motive for Musk to chop unfastened — breakup price or no breakup price — in keeping with a senior M&A lawyer accustomed to the matter.

If Musk have been to desert a bid just because he felt he overpaid, Twitter may sue him for billions in damages along with amassing the $1 billion price, the lawyer mentioned. This has occurred earlier than, resembling when Tiffany sued French luxurious items conglomerate LVMH in 2020 for attempting to again out of its agreed-upon deal. That swimsuit settled when Tiffany agreed to decrease its sale value from $16.2 billion to roughly $15.8 billion.

Musk’s reasoning for placing a transaction on maintain could also be related: he may need Twitter to decrease its sale value. Twitter shares fell greater than 8% on Friday and are down about 23% from Musk’s agreed-upon buy value of $54.20 per share. A part of the dip is expounded to an general stoop in know-how shares this month. The Nasdaq has fallen one other 11% for the reason that market shut on April 25, the day Twitter accepted Musk’s provide.

“That is most likely a negotiation tactic on behalf of Elon,” Toni Sacconaghi, Bernstein senior analysis analyst, mentioned Friday on CNBC’s “Squawk Field.” “The market has come down lots. He is most likely utilizing the guise of true energetic customers as a negotiation ploy.”

Musk might really feel some stress or obligation to different potential buyers in Twitter to decrease the value, even when the world’s wealthiest particular person is extra value agnostic.

Musk is in talks with exterior buyers for each fairness and most popular financing to reduce his private stake in Twitter. If he can get a cheaper price for the social media firm, the returns might be greater for outdoor buyers if and when Twitter returns to public possession or is resold.

Although he mentioned he remained dedicated to purchasing Twitter, Musk could also be tempted to throw within the towel given the losses he is incurring on paper with regard to his Tesla fairness possession. Shares of Tesla are down about 24% over the past month.

If Musk believes his Tesla losses are associated to his Twitter acquisition and are important sufficient to doubtlessly outweigh each the $1 billion termination price and any further damages he could be charged in court docket if he loses, he may determine strolling away made sense.

However he’d additionally should take care of the reputational harm related to breaking a deal. It is unclear any future firm would danger promoting to Musk with that observe file.

Musk was not instantly accessible to remark.

Simply as Tiffany and LVMH finally settled, Twitter might not have many good choices exterior of renegotiating with Musk. The corporate seemingly would wish to keep away from an costly protracted lawsuit. Staff might flee as the corporate would not have a transparent future plan. Twitter’s already reducing prices. On Thursday it dismissed two executives and mentioned it is placing hiring on maintain.

When Twitter agreed to promote itself to Musk for $54.20, the board did not trouble pushing for a better value partially as a result of there have been no different patrons at that value. Twitter’s board got here to the conclusion it wasn’t prone to quickly return to buying and selling at greater ranges given this yr’s valuation decline in peer shares resembling Fb and Snap.

Twitter’s finest final result could be to just accept a decrease provide from Musk.

A spokesperson for Twitter wasn’t instantly accessible to remark.

WATCH: Elon Musk says he is “nonetheless dedicated” to Twitter acquisition