Giving up on acquiring Twitter? What awaits Musk is far more than a billion-dollar "breakup fee"!

Tesla CEO Elon Musk may be too naive to pay $1 billion in termination fees to abandon acquisition of Twitter

According to foreign media CNBC, terminating the deal is not that simple. In addition to collecting a $1 billion transaction termination fee, Twitter can also file a breach of contract lawsuit against the world's richest man and demand billions of dollars in compensation.

As BitTorrent previously reported, Musk said on Friday that he had decided to "put on hold" the acquisition of Twitter as he was waiting for details to confirm that spam/fake accounts on the platform did indeed account for less than 5% of users. He reiterated after this tweet that he was still committed to the acquisition.

More than just a breakup fee

When the two parties reached an agreement last month, Musk and Twitter agreed to pay a $1 billion reverse termination fee in the contract. However, paying the breakup fee does not mean "once and for all."

The provision for paying a breakup fee applies when a deal can’t be completed for external reasons, such as regulatory intermediaries or third-party financing issues. But a senior M&A lawyer familiar with the matter said a market decline, like the current sell-off that has wiped out more than $9 billion in Twitter’s market value, doesn’t count as a valid reason for Musk to walk away, whether he pays a breakup fee or not.

The lawyer said that if Musk felt he was paid and could just walk away, Twitter could sue and demand billions in damages, in addition to collecting $1 billion in contractual fees.

This has happened before, with Tiffany suing French luxury group LVMH in 2020 in an attempt to back out of its agreed merger deal, a lawsuit that ended with Tiffany agreeing to reduce its sale price from $16.2 billion to approximately $15.8 billion.

Musk may want a better deal

Musk's reasoning for the halt may be similar: He may want Twitter to lower its sale price. Twitter shares fell more than 8% on Friday, about 23% below Musk's agreed purchase price of $54.20 per share, and their decline is tied to a broader decline in technology stocks this month. The Nasdaq has fallen another 11% since the close on April 25, the day Twitter accepted Musk's offer.

“This could be a negotiating tactic on Elon’s behalf, the market has been down a lot,” Toni Sacconaghi, senior research analyst at Bernstein, said on CNBC’s “Squawk Box.” “He could be using the guise of real active users as a negotiating tactic.”

Musk is in talks with outside investors for equity and preferred financing to reduce his personal stake in Twitter. If he can buy Twitter at a lower price, the returns for outside investors could be higher when Twitter returns to public ownership or is resold.

Maybe give up?

While the world's richest man says he remains committed to buying Twitter, Musk may be tempted to walk away given the paper losses on his Tesla shares, which have fallen about 24% in the last month.

If Musk believes that Tesla's losses are related to the Twitter acquisition and that he can afford to pay more than $1 billion in termination fees, litigation losses, additional compensation, etc., his decision to walk away makes sense.

But as an entrepreneur and public figure, he had to deal with the reputational damage associated with breaching the deal.

Twitter may need to renegotiate

Just as Tiffany and LVMH eventually reached a settlement, Twitter may not have many good options other than to renegotiate with Musk. After all, litigation in the United States is costly and time-consuming, and the company may continue to lose employees if it does not have a clear future plan.

Twitter is already cutting costs, firing two executives on Thursday and saying it would freeze hiring.

When Twitter agreed to sell itself to Musk for $54.20, the board didn’t want to raise the price, in part because there were no other competitive buyers at that price. Twitter’s board concluded that it was unlikely to recover to a higher trading price level anytime soon, given the decline in valuations of peer stocks like Facebook and Snap this year.

Therefore, the best outcome for Twitter might be to accept Musk's lower offer.

As of press time, neither Musk nor a Twitter spokesperson commented.