- July 28, 2022
- Posted by: Ramkumar
- Category: Posts
Twitter – Musk Legal Battle
Twitter Musk’s battle continues to fascinate me. It is one of the 𝗿𝗮𝗿𝗲 𝗰𝗮𝘀𝗲𝘀 𝘄𝗵𝗲𝗿𝗲 𝗽𝗲𝗿𝗳𝗼𝗿𝗺𝗶𝗻𝗴 𝗮𝗻 𝗶𝗻𝘁𝗿𝗶𝗻𝘀𝗶𝗰 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 𝗧𝘄𝗶𝘁𝘁𝗲𝗿 𝗶𝘀 𝗱𝗲𝘁𝗿𝗶𝗺𝗲𝗻𝘁𝗮𝗹 because of the 𝗵𝗶𝗴𝗵 𝗮𝘀𝘆𝗺𝗺𝗲𝘁𝗿𝗶𝗰 𝗶𝗻𝗳𝗼𝗿𝗺𝗮𝘁𝗶𝗼𝗻 (management knows more about Twitter’s current business than the shareholders) disparity between Twitter management and investors. I cannot do a Twitter #valuation on the numbers in the annual report because there are 𝗵𝗶𝗴𝗵𝗲𝗿 𝗽𝗿𝗼𝗯𝗮𝗯𝗶𝗹𝗶𝘁𝗶𝗲𝘀 𝘁𝗵𝗮𝘁 𝗮 𝗵𝗶𝗴𝗵𝗲𝗿 𝗽𝗲𝗿𝗰𝗲𝗻𝘁𝗮𝗴𝗲 𝗼𝗳 𝗗𝗮𝗶𝗹𝘆 𝗔𝗰𝘁𝗶𝘃𝗲 𝗨𝘀𝗲𝗿𝘀 𝗮𝗿𝗲 𝗯𝗼𝘁𝘀.
There is an impact on Twitter’s financials in the last quarterly results, with 𝗿𝗲𝘃𝗲𝗻𝘂𝗲𝘀 𝗱𝗲𝗰𝗹𝗶𝗻𝗶𝗻𝗴 𝗯𝘆 𝟭.𝟮% 𝗮𝗻𝗱 𝗼𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗶𝗻𝗰𝗼𝗺𝗲 𝗱𝗲𝗰𝗹𝗶𝗻𝗶𝗻𝗴 𝗯𝘆 -𝟱𝟲% 𝗮𝗴𝗮𝗶𝗻𝘀𝘁 𝟳.𝟮% 𝗤𝗼𝗤 implying that the management is distracted with this battle and unable to run daily operations effectively.
Twitter’s share currently trades at $𝟯𝟴.𝟲𝟯 𝗮𝘁 𝗮 𝟰𝟬% 𝗱𝗶𝘀𝗰𝗼𝘂𝗻𝘁 𝘁𝗼 𝗠𝘂𝘀𝗸’𝘀 𝗼𝗳𝗳𝗲𝗿 𝗽𝗿𝗶𝗰𝗲 𝗼𝗳 $𝟱𝟰.𝟮 𝗽𝗲𝗿 𝘀𝗵𝗮𝗿𝗲. The market has priced a negligible chance of Musk acquiring Twitter.
In my view, i can determine the Twitter price by answering two questions:
𝟭)𝗙𝗶𝗿𝘀𝘁, 𝗱𝗼𝗲𝘀 𝗠𝘂𝘀𝗸 𝘄𝗮𝗻𝘁 𝘁𝗼 𝗿𝘂𝗻 𝗧𝘄𝗶𝘁𝘁𝗲𝗿?
𝟮)𝗗𝗼 𝗧𝘄𝗶𝘁𝘁𝗲𝗿’𝘀 𝘀𝘁𝗮𝗸𝗲𝗵𝗼𝗹𝗱𝗲𝗿𝘀 (𝗲𝗺𝗽𝗹𝗼𝘆𝗲𝗲𝘀 𝗮𝗻𝗱 𝗺𝗮𝗻𝗮𝗴𝗲𝗺𝗲𝗻𝘁) 𝘄𝗮𝗻𝘁 𝗠𝘂𝘀𝗸 𝘁𝗼 𝗿𝘂𝗻 𝗧𝘄𝗶𝘁𝘁𝗲𝗿?
In my view, 𝘁𝗵𝗲 𝗮𝗻𝘀𝘄𝗲𝗿 𝗶𝘀 𝗡𝗢 to the above questions.
Then, do the legal battle and verdict have consequences for both parties?
A protracted legal battle and uncertainty on the verdict will prove costly to Tesla and Twitter’s businesses and reputation. Musk is the second largest shareholder in Twitter and has the more significant stake in Twitter’s future business decisions linked from employee retention to customer and supplier relationships.
Thus, a 𝘀𝗲𝘁𝘁𝗹𝗲𝗺𝗲𝗻𝘁 𝗼𝘂𝘁𝘀𝗶𝗱𝗲 𝘁𝗵𝗲 𝗰𝗼𝘂𝗿𝘁 𝗹𝗼𝗼𝗸𝘀 𝗺𝗼𝗿𝗲 𝗽𝗿𝗼𝗯𝗮𝗯𝗹𝗲 𝗻𝗼𝘄.
Thus, a question is what the settlement might look like:
1)Will Musk pay $𝟭 𝗯𝗶𝗹𝗹𝗶𝗼𝗻 𝗯𝗿𝗲𝗮𝗸𝘂𝗽 𝗳𝗲𝗲 for terminating the deal?
2)Will Twitter push Musk to pay more for the damages that he inflicted on Twitter’s reputation and its consequences on Twitter’s employee retention and customer/supplier relationships?
In my view, the answer lies between the two.
Thus, Twitter’s share price is dependent on the outcome of its settlement with Musk rather than its intrinsic value (cash flows, growth and risk), as the outcome of this battle will influence Twitter’s intrinsic value.
We will witness 𝗵𝗶𝗴𝗵 𝘃𝗼𝗹𝗮𝘁𝗶𝗹𝗶𝘁𝘆 𝗶𝗻 𝗧𝘄𝗶𝘁𝘁𝗲𝗿’𝘀 𝘀𝘁𝗼𝗰𝗸 𝗽𝗿𝗶𝗰𝗲 in the next 90 days, and traders with an excellent legal understanding of the case will reap the rewards by shorting the stock.