Twitter (TWTR) surprised Wall Street this week when it announced it had entered into an agreement to be acquired by billionaire Elon Musk, a move that would make the company private. With the acquisition price about 8% higher than where the stock is trading Tuesday morning, some investors may be tempted to try to profit from this delta. But investors should think twice before they play this game.
This deal comes with some serious risks and a good case can be made for selling Twitter stock today.
Important details you should know
Twitter announced Monday that Musk would buy the social media company for $54.20 per share in cash, valuing the company at about $44 billion. The move would take the company private, meaning shareholders would be paid cash at the time the deal is closed and Twitter shares would no longer be traded on the New York Stock Exchange.
The company seems excited about the deal. “The Twitter Board conducted a thoughtful and comprehensive process to assess Elon's proposal with a deliberate focus on value, certainty, and financing,” said Twitter Chairman Bret Taylor in a press release. “The proposed transaction will deliver a substantial cash premium, and we believe it is the best path forward for Twitter's stockholders.”
As Twitter notes, the purchase price represents 38% upside over the stock's closing price on April 1 — the day before Musk's 9% stake in the company was disclosed.
But don't forget to acknowledge the risks to this transaction. The biggest thing investors who currently own Twitter stock (or those considering buying it) should know is that there's never a guarantee that an acquisition will be completed, even when the company being acquired has already entered into a “definitive agreement” with the acquirer.
Twitter, of course, was sure to disclose the risks to this transaction, noting that it is “subject to the approval of Twitter stockholders, the receipt of applicable regulatory approvals and the satisfaction of other customary closing conditions.”
What could happen if the deal falls through
There's significant risk to holding. If the deal does not work out, Twitter shares could plummet. After all, the stock's recent gain is almost entirely due to the likelihood of Musk buying the company at a price of $54.20 per share. Without this possible deal, and without the promise of Musk's leadership, the stock could spiral downward as investors contemplate what a failed deal could mean for the company's future.
It's worth noting that all we know about the deal's timing is that it is expected to close sometime this year. There are eight months left in the year. Would the risk of holding during that period really be worth just an 8% premium to today's price? Probably not.
It’s also worth noting that since this isn't a company buying Twitter, there may be a lower risk of any potential antitrust issues. Further, the financials behind the deal may be simpler — and the parties easier to deal with — than if this were a merger between two companies as opposed to a buyout buy a billionaire. Nevertheless, such a large deal from a single person is uncharted territory and could pose unforeseen risks. So investors should tread carefully when considering the probability of this deal closing.
All of this to say, a strong case can be made for selling Twitter stock today. And to those thinking of buying Twitter stock today, there’s good reason to stay on the sidelines.
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Originally published on Fool.com
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns and recommends Twitter. The Motley Fool has a disclosure policy.