Source: PaxForex Premium Analytics Portal, Fundamental Insight
Social media platform Twitter has been in the spotlight lately amid a heated drama between it and billionaire and potential future owner Elon Musk. Both sides have agreed to buy back about $44 billion worth of stock, but Musk has begun to stall over concerns about spam and "bots" on the platform.
Investors found themselves somewhat confused, not knowing if the deal would go through at the agreed price of $54.20. Stay or go? As it turns out, shareholders may be faced with a guaranteed win scenario. Here's what you need to know.
Twitter stock is currently trading at about $37 a share; that's almost 32% less than the $54.20 Musk agreed to pay for Twitter on a per-share basis. The stock was trading around $40 before the buyout rumors surfaced, so the market can say with this price action, "We don't think the deal will happen."
Investors should remember that the deal "took place" legally; Musk officially signed the agreement. To undo the deal would require court intervention, which would require proof of breach of contract or other legal grounds for undoing the agreement.
Taking both parties to court would be very costly and messy from a public perspective. Both sides have agreed to a $1 billion reward if the deal doesn't go through, but Twitter could sue Musk for additional damages to shareholders if he formally rejects the buyout. The complexities of such a path probably mean that the deal will go through.
But it is also possible that Musk has seen a bear market among tech stocks and feels he is no longer paying a fair price for Twitter. Let's not speculate, but even if both sides renegotiate the price, which Twitter has so far publicly resisted, the current share price leaves investors free to profit even from a marked drop in the buyout price.
But what if the deal doesn't go through? Perhaps Musk is right that the presence of "bots" on the platform is a legitimate cause for concern, and he will sue for a buyout. Twitter will at least get $1 billion as part of the agreement it made with Musk.
Twitter holds more than $6 billion in cash and short-term investments for a total market capitalization of $30 billion. With an additional $1 billion, investors will receive nearly a quarter of Twitter's market value in cash.
Having that much cash means the company is financially stable; it allows management to invest in growing the company, making an acquisition, or even becoming more attractive to another buyer. And that's without taking into account potential recoveries. The company's stock is likely to be volatile if the deal doesn't go through because of all the drama. Nonetheless, long-term investors will get a well-capitalized technology company that could turn into something better in the future.
Investors are in a good position whether or not Musk buys Twitter. If so, great - shareholders will get the difference between today's stock price and the $54.20 Musk agreed to, or the amount that will be renegotiated. It's unlikely that Twitter shareholders will agree to sell the stock at a price close to what it's trading at today.
On the other hand, Twitter would have more money left over to innovate or attract a new buyer if the deal does fall through. Musk drew a legal line in the sand when he formally agreed to buy at $54.20 a share, even if he now has buyer's remorse, and a return to that line would almost certainly result in lawsuits from defrauded shareholders.
Twitter's recent stock decline gives investors a potential benefit in both scenarios. In contrast, the situation would be much riskier if the stock was still trading near its original buyback price.
As long as the price is below 41.50, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 39.42
- Take Profit 1: 35.20
- Take Profit 2: 31.50
Alternative scenario:
If the level of 41.50 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 41.50
- Take Profit 1: 44.90
- Take Profit 2: 50.00
