There was a time when Tesla’s Elon Musk and Amazon’s Jeff Bezos were in competition for the title of richest person in the world. Bezos was the champion more often than not, depending on which of the two companies’ stock prices were up on any given day. However, Tesla’s November 2021 rally put Bezos out of the running.
When Tesla stock peaked at $1,243.49 per share, there was no question that Musk had a firm hold on the number one spot. As of late April 2022, Elon Musk’s net worth is $246 billion, which gives him the resources to do just about anything he wants.
What Elon Musk wants, apparently, is to take over Twitter (TWTR). Though it balked at first, the board eventually accepted his offer. On April 25th, Twitter’s board agreed to sell the company to Musk for $44 billion. He plans to take Twitter private as soon as the deal closes, and he says the platform will become a digital town square that promotes free speech.
The trouble with Elon Musk’s purchase of Twitter is that many of Tesla’s shareholders aren’t pleased. They see any number of challenges with the acquisition, and they are concerned about how that will impact Tesla. As a result, Tesla stock went down – a lot. Will that trend continue, or will Tesla stock recover?
Why Did Tesla Stock Drop?
The entire Twitter saga began on April 4, 2022, when Elon Musk announced that he had increased his stake in the company. Tesla stock went down almost immediately, and the trend continued as Musk negotiated with Twitter’s board to make the sale happen.
On April 26th, the day after Twitter’s board accepted Musk’s offer to acquire the company for $44 billion, Tesla stock fell another 12 percent.
In a single day, the company’s valuation decreased by $126 billion. The total decline in Tesla share prices since April 4th? An astonishing 23 percent or $275 billion. It’s worth mentioning that since Musk owns 17 percent of Tesla, he lost more than $40 billion in equity in less than a month.
Now, it’s not fair to say that Musk’s Twitter bid is the only reason Tesla stock dropped.
Tech companies as a whole are falling out of favor because of rising interest rates, record-high inflation, and the prospect of a global recession due in part to Russia’s invasion of Ukraine. However, Musk’s Twitter deal alarmed investors who were already anxious, resulting in a selloff of Tesla stock.
In putting the deal together, Musk said he would be personally responsible for $21 billion of the $44 billion Twitter purchase.
He will accomplish that by putting up some of his Tesla stock as collateral in addition to selling a chunk of his Tesla shares. That doesn’t give investors confidence, as a drop in Tesla’s stock could make things very uncomfortable from a financial perspective.
Shareholders are also concerned that with his current responsibilities related to Tesla and SpaceX, two companies that need constant attention if they are to transform the future of energy and space travel, Musk simply doesn’t have time to devote to Twitter. They argue that any effort directed at expanding the social media platform will necessarily take away from Tesla, and a large group of Tesla shareholders thinks the move will spread Musk a bit too thin.
After all, it’s not like Twitter is a profitable company. In fact, Twitter operated at a loss for eight of the past ten years. It struggles to grow its user base, and its revenue from advertising is inconsistent. Musk is either content with taking the project on as a costly hobby, or he intends to pour resources – including his time – into a complete transformation.
What Will Taking Twitter Private Do?
Musk’s talk of a digital town square that promotes free speech would alarm investors and regulators if the company continued to trade publicly. His decision to take Twitter private is likely due, in part, to the autonomy that comes when there aren’t any shareholders to consider.
Some social media experts suggest that turning Twitter into a private company won’t stop the intense public scrutiny of its policies and practices. After all, there are government leaders, entertainers, and influencers setting policy and shaping the public narrative through their tweets – so much so that some users were banned from the platform altogether after using Twitter to encourage the storming of the Capital on January 6, 2021.
Could Musk bring those voices back when he takes Twitter private? Probably. With Musk at the helm, it is possible that any negative sentiment over new Twitter policies could carry over to Tesla stock. That’s what keeps Tesla shareholders up at night.
What Could Still Go Wrong With The Twitter Deal?
Though Elon Musk’s offer has been accepted by Twitter’s board, the transfer of ownership isn’t guaranteed. A number of things could still go wrong with the deal, starting with the possibility that Musk simply changes his mind.
That’s not usually an issue in the world of mergers and acquisitions, but little Elon Musk does is by the book. He is known for his mercurial temperament, and he is nothing if not unpredictable. A phrase has been coined to describe his unexpected decisions: Acts of Elon. The Twitter project could turn into another example of his inconsistency, especially if it continues to drive Tesla stock prices down.
It is also possible, though unlikely, that another buyer will make a better offer. Musk would have the option of increasing his bid or bowing out. Other reasons the acquisition could fail include the fact that regulatory agencies may have issues with the acquisition, financing could fall through, or shareholders could reject the sale.
All in all, M&A experts are putting the odds of the deal closing at about 70 percent, which sounds high but is actually quite low when compared to the standard odds for mergers and acquisitions that have reached this stage in the process.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.