Elon Musk has launched a hostile takeover of Twitter. He is offering $54.20 per share in cash. This values Twitter at about $43 billion. Musk announced the offer in a filing with the U.S. Securities and Exchange Commission on Thursday, after turning down a board seat at the company.
I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy.
However, since making my investment I now realize the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company.
As a result, I am offering to buy 100% of Twitter for $54.20 per share in cash, a 54% premium over the day before I began investing in Twitter and a 38% premium over the day before my investment was publicly announced. My offer is my best and final offer and if it is not accepted, I would need to reconsider my position as a shareholder.
Twitter has extraordinary potential. I will unlock it.
Of course, Musk had to fit a “420” in the offering price!
Two things can happen: the Twitter board can accept the offer or reject it. If they accept it, then Twitter’s stock price will rise to near Musk’s take over price. If they reject it, then the stock will fall, especially with Musk stating that “I would need to reconsider my position as a shareholder.” However, don’t expect Elon to lose money when the stock price of Twitter goes down.
In all likelihood, Musk has hedged his bet on this takeover. He would do this by buying a ton of out of the money put options on Twitter. A put option (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell specified amount of an underlying security at a predetermined price within a specified time frame.
Since the puts are “out of the money” (meaning the strike price is lower than the actual stock price) they are cheap to buy. Musk isn’t hoping to make money off the puts. It’s a hedge in case the takeover goes against him.
If The Twitter Accepts The Offer
If Twitter accepts Musk’s offer, he’ll have to find some way to come up with $43 billion, and it’s also a reason why Tesla’s stock price went down today. The fear is Musk would have to unload some Tesla stocks in order to buy Twitter.
Elon Musk would then become the sole owner of Twitter and he would let those put options expire worthless. The few millions he spent buying the puts would be written off as some kind of insurance or investment expense.
If Twitter Rejects The Takeover Offer
Twitter rejecting the offer would immediately send the stock price of Twitter down. Musk can then add to this by selling the 9.2% of Twitter he already owns. If he acts fast enough, he should be able to get out at break even or with a slight profit since the stock is up from when he bought it.
Musk’s Twitter dump would then be announced in a SEC filing. This will further depress the stock price and those out of the money put options would suddenly become “in the money.” The more the stock price of Twitter drops, the more money Musk will make.
No matter which way the Twitter board goes, Elon Musk will walk away from this a richer man.