It is convenient for both parties to settle out of court, and sell the company to a third party for a lower price
Elon Musk is hedging his bets in the Twitter court case. He revealed on Tuesday that he had sold another $7 billion worth of Tesla stock in the “hopefully unlikely” event that he has to close the $44 billion deal for the social network he decided to leave last month. It would be better for Twitter shareholders — Musk included — if the board came to terms with his eccentric and unwilling buyer and sold someone else for less.
The two parties will go to court in October to fight over the details of the merger document. However, it is in neither party’s interest to submit to a legal battle.
Instead, Musk could pay to back down. Although he is reluctant to hand over the cash, he would be paying himself in part, since he still owns almost 10% of the company. A $5 billion payout, for example, equates to about $6.50 per share, or $475 million in Musk’s pocket, if the company distributes it as a special dividend.
That helps alleviate the damage for the remaining shareholders, too. Musk offered $54.20 a share in April, so the cancellation fee would allow Twitter’s board of directors to accept a new offer for just under $48 a share and not lose. Of course, that’s 50% higher than $32 a share, which is fair value. But it’s also less than a tenth above where the stock currently trades. In addition, Musk has raised $7 billion from venture capital partners like Sequoia Capital and Larry Ellison. They could take the opportunity of a cheaper deal.
There are other benefits to Musk. Assuming he bought out his Twitter stake at the end of March, a new deal at $48 a share would bring him an additional $560 million in earnings. Even so, he would have to pay 4,000 million to Twitter. But Musk has said that if he doesn’t use the cash from his Tesla stock sales to close the deal, he would buy back the automaker’s stock from him. These have fallen by more than a quarter since the beginning of April, so they could represent an investment opportunity for him.
Selling to a willing buyer is also a better outcome than renegotiating a deal with Musk, who continues to drag Twitter’s business model through the mud. It’s possible that his investors could get rid of Musk and win.