How the spread of M&As may soon decline

  • Twitter is still below Elon Musk’s acquisition price, providing a merger arbitrage opportunity for investors.
  • But Musk recently brought in $7 billion in new investment, narrowing the gap between the stock and its offering price.
  • The influx of capital gives Wall Street more confidence that the deal is happening.

Wall Street has more confidence in Elon Musk’s takeover bid on Twitter, which has helped narrow the gap between the stock price and the bid price.

Since Twitter accepted its offer on April 24, the stock has stubbornly stayed below its $54.20 per share offer amid continued skepticism about the takeover. This spread provides a so-called merger arbitrage opportunity for investors who want to bet that the stock will reach the buyout price and deliver a net return.

“The people playing it right now are probably arbitrage investors,” Angelo Zino, senior industry analyst at CFRA Research, told Insider.

None other than Warren Buffett recently made a similar play when the legendary investor revealed last weekend that he had bought more Activision shares as they remained below Microsoft’s takeover price.

But the Twitter stock arbitrage opportunity may close soon. Musk’s revelation on Thursday that he has secured an additional $7 billion in outside funding gave credence to an offer that quickly went from rumored to a $44 billion deal that analysts say is nearly complete. .

The fact that some big names are investing has also helped boost confidence in the deal. Musk said he received commitments from 19 investors, including $1 billion from Oracle co-founder Larry Ellison, $850 million from Sequoia Capital, $500 million from Binance and $400 million from Andreessen Horowitz.

This was not always the case. After Musk’s initial offer on Twitter on April 15, the stock fell 1.7% despite offering an 18% premium. Wall Street doubted he was serious. Stifel even downgraded his rating on Twitter, saying the company was caught up in a “full-fledged Elon circus.”

Above that skepticism rose Musk’s claim in 2018 that he had secured financing to take Tesla private at $420 a share, putting him in the crosshairs of the Securities and Exchange Commission. And Musk has made it clear from the start of his Twitter lawsuit that he was only interested in the company because of its “strong and intuitive sense” for fostering free speech on the media platform. social.

But his offer is no longer dismissed as a vanity project.

“He’s making progress. He’s showing he takes this very seriously,” Gordon Haskett analyst Don Bilson wrote in a note Thursday after the $7 billion investment was disclosed.

That progress also includes Musk’s announced plans to appoint himself as temporary CEO, with the possibility of bringing back former CEO Jack Dorsey, who owns 2.4% of Twitter.

And Musk could attract even more new investors. Bilson named Thoma Bravo and Silver Lake as possibilities, noting that the latter already owns Twitter shares and convertible notes.

A few more investors could put Musk above. Wedbush analyst Dan Ives said Thursday’s funding announcement “significantly increased the odds of the Twitter deal going through.” He said Wall Street now considered the deal “95%” done.

CFRA’s Zino sees few regulatory hurdles to the Twitter takeover and predicted that the spread between the stock and the offering price could narrow below 5% heading into the second half. On Friday, Twitter stock was just below $50, about 8% below the repurchase price.

For now, the current meltdown in the broader stock market could make Twitter more attractive as a merger arbitrage game.

“If all of a sudden you bottom out in the market, maybe some of these investors are looking for better opportunities,” Zino said.

Sallie R. Loera