Key points:
- Twitter stock is languishing well below the cash bid
- One thought is that the low Tesla Stock price is constraining Musk's budget
- If this is true then TWTR is geared to TSLA
It's entirely true that the Tesla (NASDAQ: TSLA) stock price has strengthened over the past few days, up near 10% in the last five days in fact. Yet that's not quite the point of interest for us here – rather, it's the larger and longer decline in Tesla and how this influences Elon Musk and that Twitter (NYSE: TWTR) bid. For Twitter stock has risen also in these past 5 days but by only 4% or so. Leaving that TWTR share price still hugely below the cash bid from Musk.
So, the market is thinking that the Twitter bid isn't going to go ahead for whatever reason – a gap of $38.79 to $54.20 really is indicating that the bid is thought to be about not to happen. Which leads to the interesting question of why the market might think this? One part of that could be the way that Elon Musk is negotiating here. Having announced the cash bid he's now arguing about the number of ‘bot accounts. That might seem like a minor issue but given that the Twitter board has reported 5% as a number to the SEC that does make it an official number.
It's entirely possible to see this all as being just negotiation. Having got the Twitter board to agree to being taken over Musk is just now haggling on price – and you don't get to be the world's richest man without a certain ability at that.
Also read: How To Buy Tesla Shares.
There is another way of looking at this though which is that the falls in the Tesla stock price in recent months have made Elon Musk budget constrained. This can indeed happen even to the world's richest man – he's trying to buy more than he can afford. Now, the precise details of exactly how much of his other wealth is already pledged is a little unknown, but he does need to come up with tens of billions in equity to finance the Twitter deal. That can be pledges against other assets, in part, some needs to be cash. Yes, some other investors are agreeing to follow him into what will be a private company. But still – cash is required. The lower the Tesla share price the more difficult it is for Musk to raise this sum.
This is something we've discussed before, can Elon Musk even afford Twitter? The thing being that by most calculations he can, but only if Tesla's stock price holds up, or even improves from here.
The implication of this is that Twitter's stock price may well be geared to that of Tesla. If – as and when – Tesla's price rises then the Twitter deal becomes more affordable for Musk which should then increase the TWTR price to something much closer to that $54.20 cash bid price. Because the Tesla price rise would make the Twitter cash bid more likely. Of course, this analysis does insist that Musk is perceived to be budget constrained at present but that is a reasonable, even if not proven, assumption.