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

Elon Musk’s fitful attempt to take over Twitter is shaping up to be the event of the year for hedge funds that bet on takeover deals going through or collapsing.

Musk’s marijuana-inspired $54.20-a-share offer has helped keep Twitter’s shares aloft, even as the rest of the technology complex has been taken to the woodshed in recent months.

For example, shares in Snap, another advertising-dependent social media company, have fallen 66 per cent since Musk first announced he had acquired a big chunk of Twitter in early April. If Musk succeeds in walking away from the agreed $44bn acquisition — as he now seems to be trying — then the collapse in Twitter shares will be the stuff of legend.

On the other hand, Twitter is at pixel time trading at $38.98 a share because of Musk’s prevarication, an exceptionally fat discount to an agreed and theoretically binding takeover price. That makes it a tempting target for M&A arbitrage hedge funds, who make money from predicting whether deals will succeed or not — the kind of situation that can make or break someone’s year.

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

Line chart of Twitter share price ($) showing Adventures in Muskland

However, the reality is that Musk is simply so unpredictable that most of the M&A arbs FT Alphaville talked to are staying well away. It seems that the money to be made on successfully betting on the deal collapsing or going through is simply not enough to compensate for comical uncertainty stirred up by Tesla’s technoking.

Take Musk’s belated insistence on finding out how many of Twitter’s user’s are bots. Whether or not the social media company’s subsequent pledge to share the “fire hose” of user data will placate the errant billionaire remains unclear. Musk could close his $44bn deal tomorrow. Or he could take Twitter to court.

M&A arbs typically chase low-risk, market-neutral strategies, and spend time trawling through antitrust issues, legal fine 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”, said one arbitrage specialist. Compare that with a relatively “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 value if the deal collapses but could double if it goes through, said Tancredi Cordero, chief executive at Kuros Associates. “A two-to-one risk reward profile isn’t bad, but it’s not great.”

That might explain why data from S3 Partners show short interest in Twitter shares has barely budged from around 5 per cent since early February, for an overall notional short position 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,” said Scott Kessler, an analyst at Third Bridge.* “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 agreement and waived due diligence, Musk should in theory be locked into his deal, though he could yet walk away just $1bn worse off if the banks who agreed to provide a $13bn chunk of the financing package get cold feet.

Alternatively, he could take a leaf out of Thoma Bravo’s book. The buyout group last week trimmed its offer for US software company Anaplan, which agreed to the amended terms “to avoid the risk of lengthy litigation”. Legally this is difficult, but some think it is how the Twitter saga will be resolved.

“That certainly requires some legal heavy lifting but if anyone is capable of that it’s Musk,” said Benjamin Kelly, a trader 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 battle “every time,” Kelly added. “But he’s not, so I guess a lowered bid is a possibility.”

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