Elon Musk faces a lawsuit filed May 25, 2022 accusing him of pushing down Twitter's stock price in order to either give himself an escape hatch from his $44 billion buyout bid, or room to negotiate a discount. The suit alleges the billionaire Tesla boss tweeted and made statements intended to create doubt about the deal, which has roiled the social media platform for weeks.BRENDAN SMIALOWSKI/AFP/Getty Images
Hands up if, last month, you thought it was a good idea to buy Twitter Inc. TWTR-N stock when the company accepted Elon Musk’s offer to purchase it.
The founder of Tesla had offered to buy Twitter at US$54.20 a share. Yet when the offer was accepted Twitter was trading, even at its very highest, at about 5 per cent less a share than Mr. Musk’s offer.
So, if you’d bought Twitter and then waited for Mr. Musk to buy it off you, that’d be free money, no?
Well, not exactly.
Twitter investors sue Elon Musk for stock ‘manipulation’ during takeover bid
Even at the time, that move would bring to mind a similar story involving Mr. Musk that kind of went off the rails – when, in 2021, the man embraced bitcoin.
Now that Mr. Musk has paused his purchase of Twitter, ostensibly on issues related to spam accounts, and the company’s shares fell 20 per cent as result, these two stories even carry the same moral: Think twice before buying something that Mr. Musk pumps. There’s only pain at the end of that game.
In 2021, Mr. Musk repeatedly talked up bitcoin on Twitter, and then Tesla disclosed it had bought US$1.5-billion worth of bitcoin and would accept it as payment. Bitcoin prices surged by as much as 20 per cent in each instance. Then Mr. Musk suddenly reversed course and tweeted that Tesla would not accept bitcoin after all. The cryptocurrency’s price went down as much as 20 per cent in the coming days.
Sound familiar?
That’s the same situation as with the Twitter acquisition, and in both instances, the pretext for Mr. Musk’s changing of position was equally paper-thin.
In withdrawing his bitcoin support, Mr. Musk cited the environmental criticism of bitcoin: that mining – the process of facilitating and recording transactions – uses a lot of electricity.
Maybe that is a valid criticism. Maybe not. What’s undisputed is that this environmental criticism is among the top three items that come to mind whenever anyone thinks of bitcoin. Mr. Musk would have us believe that he was somehow unaware of it when he tweeted his support but then magically discovered it days later.
In pausing the Twitter purchase, Mr. Musk’s rationale was that the company’s position of having under 5 per cent of “false or spam” accounts was inaccurate. Yet again, this is an issue that has been known and talked about for years. That Mr. Musk would only recently become aware of it – that’s as absurd as suddenly learning that the sky is blue or that elephants are big.
What’s more, Mr. Musk had waived due diligence when he made his acquisition offer. That means that Mr. Musk is now complaining about non-human users despite knowing that he’d agreed to buy Twitter no matter how many such users it had.
Mr. Musk did say, of course, that he’s still committed to the purchase. Maybe, given the recent beat down on tech stocks, Mr. Musk simply no longer wants to pay as much as he’d pledged.
Even so, it would still be just like with his bitcoin reversal: Mr. Musk appears to be grasping at straws to find a face-saving way to weasel out of an earlier position that he’d made in a rather flashy manner.
In terms of the resulting market movements, we have a formula here:
- Mr. Musk tweets about a move that causes the value of an asset to rise.
- Said move grabs a lot of attention.
- Mr. Musk retreats from his attention-grabbing move, making a big deal out of perceived issues that he ought to have known before he’d made said move.
- The asset that rose on Mr. Musk’s attention-grabbing move falls back down.
It’s not Mr. Musk’s fault necessarily. We all make decision we later regret, announce moves prematurely. It’s just that, as the world’s richest man, you’re playing with bigger stakes and all your moves are public.
So, what can an investor learn from this? The next time Mr. Musk announces another bold new action and causes the price of an asset to rise, be prepared for it to fall back down.
After all, the bitcoin embrace isn’t even the only Musk move that the Twitter acquisition brings to mind. Remember 2018, when Mr. Musk said he’d take Tesla private on a much higher valuation?
Tesla did rally through the bull market of the ensuing years, just like anything that people bought back in 2018. But in the month that followed the unravelling of the privatization deal, from peak to trough, Tesla stock fell as much as 30 per cent.
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