Musk’s $44bn Twitter deal is an M&A arb dream — or nightmare


Elon Musk’s fitful try to take over Twitter is shaping as much as be the occasion of the 12 months for hedge funds that wager on takeover offers going by or collapsing.

Musk’s marijuana-inspired $54.20-a-share supply has helped preserve Twitter’s shares aloft, whilst the remainder of the expertise complicated has been taken to the woodshed in latest months.

For instance, shares in Snap, one other advertising-dependent social media firm, have fallen 66 per cent since Musk first introduced he had acquired a giant chunk of Twitter in early April. If Musk succeeds in strolling away from the agreed $44bn acquisition — as he now appears to be attempting — then the collapse in Twitter shares would be the stuff of legend.

On the opposite hand, Twitter is at pixel time buying and selling at $38.98 a share due to Musk’s prevarication, an exceptionally fats low cost to an agreed and theoretically binding takeover worth. That makes it a tempting goal for M&A arbitrage hedge funds, who generate income from predicting whether or not offers will succeed or not — the form of scenario that may make or break somebody’s 12 months.

“This is an arb traders dream,” stated Felix Lo, portfolio supervisor at Trium Capital. Musk’s erratic tweeting means “there’s practically a news item every day. Price fluctuations are good for us.”

However, the fact is that Musk is just so unpredictable that many of the M&A arbs FT Alphaville talked to are staying nicely away. It appears that the cash to be made on efficiently betting on the deal collapsing or going by is solely not sufficient to compensate for comical uncertainty stirred up by Tesla’s technoking.

Take Musk’s belated insistence on discovering out what number of of Twitter’s person’s are bots. Whether or not the social media firm’s subsequent pledge to share the “fire hose” of person information will placate the errant billionaire stays unclear. Musk may shut his $44bn deal tomorrow. Or he may take Twitter to court docket.

M&A arbs sometimes chase low-risk, market-neutral methods, and spend time trawling by antitrust points, authorized superb print, political opposition or rival bids. Elon’s id is unfamiliar territory.

Gambling on Musk’s Twitter deal is a bit like “picking up five dollar bills in front of a steamroller with a Ferrari on the back”, stated one arbitrage specialist. Compare that with a comparatively “safe” deal like Microsoft’s acquisition of Activision, they added: “I’d take that 10,000 times before I put money on Twitter and Elon.”

Twitter’s shares stand to roughly halve in worth if the deal collapses however may double if it goes by, stated Tancredi Cordero, chief govt at Kuros Associates. “A two-to-one risk reward profile isn’t bad, but it’s not great.”

That may clarify why information from S3 Partners present brief curiosity in Twitter shares has barely budged from round 5 per cent since early February, for an general notional brief place of $1.35bn.

“My sense is that a lot of traders are steering clear given the unpredictable nature of what seems to be going on here,” stated Scott Kessler, an analyst at Third Point. “People don’t feel like they’ve got good information, there’s a lack of transparency, and so they’re not really sure whether to be involved.”

Line chart of Percentage of Twitter's free-float shares being shorted (%). showing Twitter short positions have stayed steady despite deal uncertainty

Having signed the settlement and waived due diligence, Musk ought to in idea be locked into his deal, although he may but stroll away simply $1bn worse off if the banks who agreed to offer a $13bn chunk of the financing bundle get chilly ft.

Alternatively, he may take a leaf out of Thoma Bravo’s guide. The buyout group final week trimmed its supply for US software program firm Anaplan, which agreed to the amended phrases “to avoid the risk of lengthy litigation”. Legally that is tough, however some assume it’s how the Twitter saga will probably be resolved.

“That certainly requires some legal heavy lifting but if anyone is capable of that it’s Musk,” stated Benjamin Kelly, a dealer at Louis Capital. “I see he recently put out a job advert for a super elite legal team and he’s gonna need it if he keeps up with these crazy tweets.”

If Musk was a mere mortal, Twitter would win in a hypothetical court docket battle “every time,” Kelly added. “But he’s not, so I guess a lowered bid is a possibility.”