Social media platform Twitter (TWTR +0.00%) has been in the news lately amid a percolating drama between itself and billionaire and potential soon-to-be-owner Elon Musk. The two sides agreed on a buyout worth approximately $44 billion, but Musk has begun to pump the brakes over concerns of spam and "bot" accounts on the platform.
Investors are somewhat caught in the middle of this, unsure whether the deal will proceed at the agreed-on price of $54.20. Should you stay, or should you go? It turns out that shareholders might be looking at a "heads I win, tails I win" scenario. Here's what you need to know.
NYSE: TWTR
Key Data Points
Heads, Elon buys Twitter
Shares of Twitter currently trade at roughly $37 per share; this is nearly 32% less than the $54.20 Musk agreed to pay for Twitter on a per-share basis. The stock was trading in the mid-to-high $40s before the buyout rumors, so the market could be saying through this price action: "We don't think the deal will happen."
Image source: Getty Images.
Investors should remember that the deal is "done" from a legal standpoint; Musk formally signed an agreement. A court would have to step in to kill the deal, requiring proof of a breach of contract or other legal justification for canceling the agreement.
The two sides going to court would be very expensive and messy from a public standpoint. Both sides agreed to a $1 billion fee if the deal doesn't close, but Twitter could sue Musk for additional damages to shareholders if he formally bails on the buyout. The complications of going down that road probably mean that a deal happening is the likely outcome.
However, it's also possible that Musk has seen the bear market among technology stocks and feels that he's no longer paying a fair price for Twitter. I won't speculate further, but even if the two sides renegotiate the price, something that Twitter has thus far publicly resisted, the stock's current price leaves room for investors to profit from even a notable reduction in the buyout price.
Tails, the deal collapses
But what if the deal doesn't close? Perhaps Musk is correct that the presence of "bots" on the platform is a legitimate cause for concern, and he takes the buyout to the courts. Twitter is, at a minimum, going to receive $1 billion as part of the agreement it struck with Musk.
You can see in the chart below that Twitter is holding more than $6 billion in cash and short-term investments against a total market cap of $30 billion. With an additional $1 billion, investors get nearly a quarter of Twitter's market value as cash.
TWTR Cash and Short Term Investments (Quarterly) data by YCharts.
Having so much cash means that the company is financially stable; it gives management capital to invest in growing the company, make an acquisition, or even become more attractive to another buyer. That's not even factoring in the potential awards for damages. The stock will likely be volatile if the deal fails due to all of the drama. Still, long-term investors would have a well-capitalized tech company that might evolve into something better down the road.
Investor takeaway
Investors are left in a solid position to benefit, regardless of whether Musk buys Twitter. If he does, great -- shareholders will capture the difference between where the stock trades today and the $54.20 Musk agreed to, or whatever is renegotiated. It's unlikely that Twitter's stakeholders would agree to sell at a price near where it trades today.
On the other side of the coin, Twitter would be left with more cash to innovate or attract a new buyer if the deal somehow does fall through. Musk drew a legal line in the sand when he formally agreed to buy at $54.20 per share, even if he now has buyer's remorse, and walking that back will almost surely include lawsuits from burned shareholders.
The recent slide of Twitter stock gives investors potential upside in both scenarios. In contrast, the situation would be far riskier if the stock still traded near the initial buyout price.
