Tesla's market capitalization has evaporated hundreds of billions, for a Twitter, is Musk worth it?

As soon as Musk announced his acquisition of Twitter, a fire broke out in the backyard.

Yesterday, Twitter's board of directors just announced that it agreed to sell the company to Musk for $44 billion, and the next day, Tesla's market value evaporated by hundreds of billions of dollars.

01

What is the market worried about?

On Tuesday, Tesla's stock plunged 12.18 percent, its biggest one-day drop since September 2020, leading the tech giant, with its market value evaporating about $125 billion in a day, falling below the $1 trillion round mark, and the value of Musk's Tesla stake fell by $21 billion, in line with the $21 billion in cash he promised to buy Twitter.

In addition, since Musk disclosed his stake in Twitter in early April, Tesla stock has fallen by a cumulative 23%.

Some analysts pointed out that the market is not optimistic about Musk's acquisition of Twitter. Because Musk may need to significantly sell his personal stake in Tesla to raise acquisition funds, and after the completion of the acquisition, Musk will need to share the energy of managing Twitter, which may affect Tesla's day-to-day operations.

Some netizens even joked on Twitter that today's Tesla seems to have been abandoned by Musk.

As mentioned in the previous article, Musk has obtained $46.5 billion to acquire Twitter, but more than two-thirds of the funds are either paid for by him out of his own pocket or collateralized by his Tesla stock.

According to Bloomberg estimates, Musk spent $2.6 billion in recent months to acquire a 9.1 percent stake in Twitter and currently has about $3 billion in cash or other liquid assets. His stake in Tesla and Space X total about $184 billion.

Musk needs to pledge about 58.7 million shares of Tesla stock to secure the $12.5 billion margin loan included in the debt financing. This would bring the total number of shares pledged by him to about 85% of his shares. The margin loan documents do allow Musk to sell his unpledged Tesla shares.

The unpledged stock is worth more than $25 billion, so if Musk chooses to sell it all, plus the cash he has now, it's enough to pay for an after-tax $21 billion equity financing. But it has also raised concerns among investors and analysts.

"Tesla will face three blows today," said National Securities Corp. Arthur Hogan, chief market strategist, said, "In addition to fears of selling (Tesla stock) and an intensification of the sell-off in growth stocks, Tesla stock also reflects some (investors) concerns that Musk is overly distracted and facing new challenges." ”

Twitter's shares also fell 3.9 percent on Tuesday to close at $49.68, though Musk agreed Monday to buy the company for $54.20 per share in cash. The widening spread reflects investors' fears of a sharp drop in Tesla's stock price and could lead Musk to reconsider its deal with Twitter, as much of Musk's $239 billion fortune comes from Tesla.

According to Reuters, Ed Moya, senior market analyst at Wanda Forex Platform (OANDA), said:

"If Tesla's stock price continues to be in free fall, that will jeopardize his financing."

David Kirsch, a professor at the University of Maryland, focuses on innovation and entrepreneurship. He said investors began to worry about "a flurry of margin calls" on Musk's loans.

02

Musk could have paid a $1 billion breakup fee

For a Twitter, is it worth it?

This situation makes one wonder, is Musk "worth it" for a Tweet?

According to the Financial Times, Twitter disclosed a "reverse termination fee" in a regulatory filing on Tuesday, and Musk could waive his deal with Twitter by paying a $1 billion penalty.

That means Musk could abandon the deal by paying less than 1 percent of his net worth and a fraction of the $21 billion stake he promised to complete the acquisition.

Daniel Rubin, an M&A lawyer at U.S. corporate law firm Dechert, said:

"No matter what Musk does, he knows his debt ceiling is $1 billion."

According to the contract, "Under no circumstances shall the Company (Twitter) be entitled to accrued damages in excess of the parent company's termination fees." Rubin said the termination fee was "not even close to the market level" and was "very ... It's a better deal for Musk."

Rubin added that the fee was just 2.27 percent of the total amount of the deal, less than half the fines a private equity firm would normally pay when it abandons an acquisition, which typically stands at 6 percent or more.

Brian Quinn, an associate professor in Boston University's Law School, said:

"If I were a seller, I would ask for a decent reverse termination fee – if it's only 2.27%, I don't think that's a lot."

03

The biggest winner of Twitter's acquisition

In the eyes of Wall Street agencies, the biggest winner of Tesla CEO Musk's acquisition of Twitter may not be to avoid repeating the mistakes of Netflix, but other social media such as YouTube, Facebook, or Snap, which is owned by Google's parent company, and they will grab Twitter's lost digital advertising market share, and advertising revenue will grow as a result.

JMP analysts believe that Musk values free speech and believes that free speech is essential to Twitter, which may allow Twitter to reduce content moderation on the platform, while some brands that do not want their content to be associated with fake news or hateful speech may withdraw advertising spend on Twitter.

JMP believes that 85% of Twitter's operating income comes from the brand's advertising campaigns, because Musk puts free speech first, and Twitter's advertisers may shift their budgets to other platforms out of concerns about brand safety. This could help Google's sibling Companies YouTube, Snap, Facebook's parent company Meta, and TikTok.

Analysts at MKM expect Musk to take Twitter private likely to benefit social media like Pinterest and Snap, which are smaller than Twitter. Analysts at Evercore expect merchants to clearly focus their marketing campaigns on Reddit, Google, Meta, Snap and TikTok.

Analysts at Stifel expect that if Twitter were to pull out the entire digital advertising industry, that would be slightly positive news for other social media. In 2023, about $7 billion of Twitter's advertising revenue will flow into other platforms. The platforms that stole Twitter's revenue were social media like Snap, Pinterest and TikTok.

Star Wall Street sees, good content is not missed

This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, opinions or conclusions in this article are appropriate for their particular situation. The market is risky, investment needs to be cautious, please judge and make decisions independently.

Will the acquisition of Twitter affect Tesla's operations?