October 11, 2024

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Musk’s plan to buy Twitter has worried policymakers around the world.
Joe Skipper | Reuters

Elon Musk can’t just walk away from his deal to acquire Twitter by paying an agreed-upon $1 billion breakup fee. It’s not that simple.

Musk Friday tweeted that he has decided to put his acquisition of Twitter “on hold” as he researches whether the amount of fake/spam accounts on Twitter is actually just 5%, as the company has long claimed. He followed that tweet with another reiterating that he is still committed to the acquisition.

But he risks a lawsuit from Twitter for breach of contract that could cost the world’s wealthiest man many billions of dollars.

More than a breakup fee

Musk and Twitter agreed to a so-called reverse termination fee of $1 billion when the two sides agreed to a deal last month. Still, the break fee isn’t an option payment that allows Musk to bail without consequence.

A reverse break fee paid from a buyer to a target applies when there is an outside reason a deal can’t close, such as regulatory intermediation or third-party financing concerns. A market dip, like the one current sell-off that has caused Twitter to lose more than $9 billion in market cap, wouldn’t count as a valid reason for Musk to cut loose — break fee or no break fee — according to a senior M&A lawyer familiar with the matter.

If Musk were to walk away simply because he felt he overpaid, Twitter could sue him for billions in damages in addition to collecting the $1 billion fee, the lawyer said. This has happened before, such as when Tiffany sued French luxury goods conglomerate LVMH in 2020 for trying to back out of its agreed-upon deal. That suit settled when Tiffany agreed to lower its sale price from $16.2 billion to roughly $15.8 billion.

Musk and investors may want a better deal

Musk’s reasoning for putting a transaction on hold may be similar: he might want Twitter to lower its sale price. Twitter shares fell more than 8% Friday and are down about 23% from Musk’s agreed-upon purchase price of $54.20 per share. Part of the dip is related to an overall slump in technology stocks this month. The Nasdaq has fallen another 11% since the market close on April 25, the day Twitter accepted Musk’s offer.

“This is probably a negotiation tactic on behalf of Elon,” Toni Sacconaghi, Bernstein senior research analyst, said on CNBC’s “Squawk Box.” “The market has come down a lot. He’s probably using the guise of true active users as a negotiation ploy.”

Musk may feel some pressure or obligation to other potential investors in Twitter to lower the price, even if the world’s wealthiest man is more price agnostic.

Musk is in talks with outside investors for both equity and preferred financing to lessen his personal stake in Twitter. If he can get a lower price for Twitter, the returns could be higher for outside investors if and when Twitter returns to public ownership or is resold.

Why he could still try to bail

Though he said he remained committed to buying Twitter, Musk may be tempted to throw in the towel given the losses he’s incurring on paper with regard to his Tesla equity ownership. Shares of Tesla are down about 24% over the last month.

If Musk believes his Tesla losses are related to his Twitter acquisition and are significant enough to potentially outweigh both the $1 billion termination fee and any additional damages he would be charged in court if he loses, he could decide walking away made sense.

But he’d also have to deal with the reputational damage associated with breaking a deal. It’s unclear any future company would risk selling to Musk with that track record.

Musk was not immediately available to comment.

Twitter may need to renegotiate

Just as Tiffany and LVMH eventually settled, Twitter may not have many good options outside of renegotiating with Musk. The company likely would want to avoid an expensive protracted lawsuit. Employees may flee as the company wouldn’t have a clear future plan. Twitter’s already cutting costs. On Thursday it dismissed two executives and said it’s putting hiring on hold.

When Twitter agreed to sell itself to Musk for $54.20, the board didn’t bother pushing for a higher price in part because there were no other interested buyers at that price. Twitter’s board came to the conclusion it wasn’t likely to soon return to trading at higher levels given this year’s valuation decline in peer stocks such as Facebook and Snap.

Twitter’s best outcome may just be to accept a lower offer from Musk.

A spokesperson for Twitter wasn’t immediately available to comment.

WATCH: Elon Musk says he’s “still committed” to Twitter acquisition