Tesla's Market Value Evaporates 30% As Musk Acquires Twitter
More than a month has passed since news broke of Musk's acquisition of about 9% of Twitter's stock was disclosed in early April. Yet in such a short period of time, Tesla's stock price has plummeted by 30% and its market value has evaporated by 30%.
If the deal goes wrong, it could also spill over to Tesla and Twitter shareholders, and put more pressure on Twitter's finances. Now there are already signs that investors are deeply concerned. Aswath Damodaran, a professor of finance at New York University's Stern School of Business, said, "Even if Musk could afford to raise the money, it would not be a smart deal from a financial perspective."
Tesla shareholders want to know what will happen as a result when the CEO becomes the overseer of the Internet wars.
If the deal goes wrong, it could also spill over to Tesla and Twitter shareholders, and put more pressure on Twitter's finances. Now there are already signs that investors are deeply concerned. Aswath Damodaran, a professor of finance at New York University's Stern School of Business, said, "Even if Musk could afford to raise the money, it would not be a smart deal from a financial perspective."
Tesla shareholders want to know what will happen as a result when the CEO becomes the overseer of the Internet wars.
Tesla Stock Weighs in on Deal
Musk and his partners are investing more than $20 billion in cash to buy Twitter, but he also intends to get a $6.25 billion loan by pledging Tesla stock as collateral, down from $12.5 billion previously. Analysts say it's hard to imagine any other deal that would leave an individual carrying such a large stock-backed loan (i.e., a margin loan) to help buy another company, analysts said.
The terms of the loan may change, but terms disclosed early in the process suggest that the lender saw it as a potentially risky part of the deal. A filing showed that the bank required Musk to pledge Tesla stock worth five times the value of the loan, which gave them plenty of redundancy. The loan also includes a 0.5 percent upfront fee and an interest rate of more than 3 percent. Vicki Bryan, chief executive of research firm Bond Angel, said the terms are "very onerous.
Banks will likely continue to be wary because they have already provided loans to Musk. As of the end of last year, Musk had pledged more than 92 million shares of Tesla stock to secure a personal loan before making a takeover offer for Twitter, newly disclosed documents show, but they don't say how much he actually borrowed.
Musk and his partners are investing more than $20 billion in cash to buy Twitter, but he also intends to get a $6.25 billion loan by pledging Tesla stock as collateral, down from $12.5 billion previously. Analysts say it's hard to imagine any other deal that would leave an individual carrying such a large stock-backed loan (i.e., a margin loan) to help buy another company, analysts said.
The terms of the loan may change, but terms disclosed early in the process suggest that the lender saw it as a potentially risky part of the deal. A filing showed that the bank required Musk to pledge Tesla stock worth five times the value of the loan, which gave them plenty of redundancy. The loan also includes a 0.5 percent upfront fee and an interest rate of more than 3 percent. Vicki Bryan, chief executive of research firm Bond Angel, said the terms are "very onerous.
Banks will likely continue to be wary because they have already provided loans to Musk. As of the end of last year, Musk had pledged more than 92 million shares of Tesla stock to secure a personal loan before making a takeover offer for Twitter, newly disclosed documents show, but they don't say how much he actually borrowed.
Margin loan could go wrong
If Tesla's stock value plummets, Musk's margin loan to acquire Twitter could become a constraint that affects the deal. A plunge in the stock price could prompt the bank to sell the stock collateral to recoup the money it lent Musk, which in turn could trigger more selling in the market. The terms of Musk's margin loan stipulate that he must pay off the entire debt if Tesla's stock price falls by more than 40 percent from the date the terms of the loan take effect.
Tesla's business is performing well, so analysts don't expect its shares to plunge. Seventy-five percent of electric cars sold in the U.S. in the first three months of 2022 will come from Tesla, according to market researcher Cox Automotive.
More recently, traditional automakers such as Ford, Hyundai and Kia have also been selling enough attractive electric cars that most analysts expected Tesla's market share to drop. But that hasn't happened yet. Instead, Tesla's market share was even higher in the first quarter than it was a year earlier, when it held 70 percent of the U.S. market share.
No one can hold 100 percent of the market forever, and Tesla will face stiff competition," said Michelle Krebs, executive analyst at Cox Automotive. But on the other hand, every time we say that, no one has ever really challenged them."
But some analysts have seen weaknesses in Tesla's business, including a lack of new products and ongoing quality problems. They say margin loans add to the negative forces that could drag down Tesla's stock price. According to Bryan, "Now Musk brings a new risk as he pledges to pledge more stock."
If Tesla's stock value plummets, Musk's margin loan to acquire Twitter could become a constraint that affects the deal. A plunge in the stock price could prompt the bank to sell the stock collateral to recoup the money it lent Musk, which in turn could trigger more selling in the market. The terms of Musk's margin loan stipulate that he must pay off the entire debt if Tesla's stock price falls by more than 40 percent from the date the terms of the loan take effect.
Tesla's business is performing well, so analysts don't expect its shares to plunge. Seventy-five percent of electric cars sold in the U.S. in the first three months of 2022 will come from Tesla, according to market researcher Cox Automotive.
More recently, traditional automakers such as Ford, Hyundai and Kia have also been selling enough attractive electric cars that most analysts expected Tesla's market share to drop. But that hasn't happened yet. Instead, Tesla's market share was even higher in the first quarter than it was a year earlier, when it held 70 percent of the U.S. market share.
No one can hold 100 percent of the market forever, and Tesla will face stiff competition," said Michelle Krebs, executive analyst at Cox Automotive. But on the other hand, every time we say that, no one has ever really challenged them."
But some analysts have seen weaknesses in Tesla's business, including a lack of new products and ongoing quality problems. They say margin loans add to the negative forces that could drag down Tesla's stock price. According to Bryan, "Now Musk brings a new risk as he pledges to pledge more stock."
Twitter could be a distraction for Musk
In addition, Twitter could distract Musk from focusing on running Tesla and other businesses. This risk is particularly serious if managing Twitter becomes a headache, generating more controversy and leading to the alienation of potential Tesla customers. Many shareholders say that many of Musk's impromptu tweets on Twitter have damaged Tesla's imagination and interests.
Kristin Hull, founder and CEO of California investment fund Nia Impact Capital, said: "Musk says a lot of controversial things, are they distracting? Are they confusing? Has Musk interfered with the value of the stock by posting? Absolutely."
Meanwhile, the acquisition of Twitter could strengthen scrutiny of Musk by stock market regulators. He has already been sued by a Twitter shareholder alleging he missed key disclosure deadlines in his ongoing purchase of Twitter stock.
Block & Leviton, the Boston law firm representing the suit, says Musk saved himself tens of millions of dollars by disclosing information about his Twitter holdings six days past the deadline. In this case, he was able to continue buying Twitter stock at a much lower price.
Musk has a long history of confrontation with the U.S. Securities and Exchange Commission (SEC). Last month, he failed to convince a judge in New York to release him from a settlement he reached with the SEC in 2018 that required him to first be reviewed by the company's lawyers before posting tweets that could affect Tesla's stock price.
Chester Spatt, a professor of finance at Carnegie Mellon University's Tepper School of Business, said that by acquiring Twitter, "you [Musk] expose yourself directly to the SEC. It's easy to imagine the SEC saying, 'This guy's a repeat offender, what else do we need to do?'"
In addition, Twitter could distract Musk from focusing on running Tesla and other businesses. This risk is particularly serious if managing Twitter becomes a headache, generating more controversy and leading to the alienation of potential Tesla customers. Many shareholders say that many of Musk's impromptu tweets on Twitter have damaged Tesla's imagination and interests.
Kristin Hull, founder and CEO of California investment fund Nia Impact Capital, said: "Musk says a lot of controversial things, are they distracting? Are they confusing? Has Musk interfered with the value of the stock by posting? Absolutely."
Meanwhile, the acquisition of Twitter could strengthen scrutiny of Musk by stock market regulators. He has already been sued by a Twitter shareholder alleging he missed key disclosure deadlines in his ongoing purchase of Twitter stock.
Block & Leviton, the Boston law firm representing the suit, says Musk saved himself tens of millions of dollars by disclosing information about his Twitter holdings six days past the deadline. In this case, he was able to continue buying Twitter stock at a much lower price.
Musk has a long history of confrontation with the U.S. Securities and Exchange Commission (SEC). Last month, he failed to convince a judge in New York to release him from a settlement he reached with the SEC in 2018 that required him to first be reviewed by the company's lawyers before posting tweets that could affect Tesla's stock price.
Chester Spatt, a professor of finance at Carnegie Mellon University's Tepper School of Business, said that by acquiring Twitter, "you [Musk] expose yourself directly to the SEC. It's easy to imagine the SEC saying, 'This guy's a repeat offender, what else do we need to do?'"
Twitter acquisition could become a "bottomless pit"
Musk may be able to turn Twitter around, but if he can't, the company may have trouble paying back the $13 billion in new borrowing it is expected to take on under the deal plan.
If Twitter's financial situation becomes so bad that it can't pay back its new debt, Musk and the company's other shareholders will have to decide whether to provide more financial support. He may be able to borrow more money against his Tesla stock holdings, sell some of his shares or even borrow against other valuable assets, such as his stake in SpaceX, which could be worth more than $40 billion.
Asworth Damodaran, a professor of finance at New York University's Stern School of Business, said, "There's no question that Twitter can't afford this debt."
Leading shorting agency Hindenburg Research (Hindenburg Research) has issued a warning that Twitter's share price could plunge 50 percent if Musk gives up the acquisition. The agency said in its report: "Musk holds all the initiative. If he announces tomorrow that he will abandon the acquisition of Twitter, the latter's share price will plummet 50% from current levels. Therefore, we believe there is a high risk that the deal will be repriced."
Musk may be able to turn Twitter around, but if he can't, the company may have trouble paying back the $13 billion in new borrowing it is expected to take on under the deal plan.
If Twitter's financial situation becomes so bad that it can't pay back its new debt, Musk and the company's other shareholders will have to decide whether to provide more financial support. He may be able to borrow more money against his Tesla stock holdings, sell some of his shares or even borrow against other valuable assets, such as his stake in SpaceX, which could be worth more than $40 billion.
Asworth Damodaran, a professor of finance at New York University's Stern School of Business, said, "There's no question that Twitter can't afford this debt."
Leading shorting agency Hindenburg Research (Hindenburg Research) has issued a warning that Twitter's share price could plunge 50 percent if Musk gives up the acquisition. The agency said in its report: "Musk holds all the initiative. If he announces tomorrow that he will abandon the acquisition of Twitter, the latter's share price will plummet 50% from current levels. Therefore, we believe there is a high risk that the deal will be repriced."
