Source: PaxForex Premium Analytics Portal, Fundamental Insight
Twitter stunned Wall Street this Monday by announcing an agreement to be acquired by notorious Elon Musk, taking the company private. Since the acquisition price is about 8 percent higher than what the stock was trading on Tuesday morning, some investors might be tempted to try to profit from the discrepancy. But investors should think carefully before entering this game.
There are serious risks involved in this deal, and a strong case can be made for selling Twitter stock today.
Twitter announced this week that Musk would buy the company for $54.20 a share in cash, valuing it at about $44 billion. As a result, the company will go private, meaning shareholders will be paid in cash at the close of the deal, and Twitter stock will no longer be traded on the NYSE.
Looks like the company is happy with the deal. "Twitter's board of directors conducted a thoughtful and comprehensive process to evaluate Ilon's proposal, focusing on value, certainty, and financing," Twitter Chairman Bret Taylor said in a press release. "The proposed transaction will provide a significant cash premium, and we believe it is the best way forward for Twitter shareholders."
As Twitter states, the purchase price is 38 percent above the stock's closing price on April 1, the day before Musk's 9 percent stake in the company became known.
But don't forget the risks associated with this deal. The most important thing investors who currently own Twitter stock (or those considering buying it) should know is that there is never a guarantee that an acquisition will be finished, even if the business being acquired has already entered into a "definitive agreement" with the buyer.
Twitter, of course, did not fail to communicate the risks involved in this transaction, noting that it is "subject to Twitter shareholder approval, obtaining appropriate regulatory approvals and meeting other normal closing conditions."
The risk to the holding company is significant. If the deal doesn't go through, the Twitter stock could plunge. After all, the stock's recent rise is almost completely because of the likelihood that Musk would buy the company at $54.20 a share. Without this possible deal, and without the promise of Musk's leadership, the stock could go into a downward spiral as investors ponder what a failed agreement could signify for the company's future.
It's worth noting that all we know about the timing of the deal is that it should close this year. There are eight months left in the year. Is the risk of holding the stock during that period really worth the 8% premium to today's price? Probably not.
It's also worth noting that since it's not the company buying Twitter, the risk of potential antitrust problems may be lower. In addition, the financial aspects of the deal may be simpler - and easier for the parties to deal with - than if it were a merger of two companies rather than a billionaire purchase. Nevertheless, such a large deal from one person is uncharted territory and may carry unforeseen risks. Therefore, investors should be cautious in assessing the likelihood of this deal.
All that said, there is a strong case to be made today for selling Twitter stock. And for those thinking about buying the Twitter stock today, there are good reasons to stay away.
As long as the price is above the 44.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 49.37
- Take Profit 1: 53.50
- Take Profit 2: 58.00
Alternative scenario:
If the level of 44.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 44.00
- Take Profit 1: 40.00
- Take Profit 2: 36.00
