Elon Musk can’t just give up his Twitter contract by paying a $1 billion severance fee

Musk’s plan to buy Twitter has policymakers around the world worried.

Joe Skipper | Reuters

Elon Musk can’t just walk away from his deal to acquire Twitter by paying an agreed billion dollar severance fee. It is not that simple.

Musk tweeted on Friday that he had decided to put his acquisition of Twitter on hold as he investigated whether the number of fake/spam messages on Twitter was actually just 5%, as the company has long claimed.

He followed that tweet with another reiterating that he is still committed to the acquisition.

But he faces a breach of contract lawsuit from Twitter that could cost the world’s richest person billions of dollars.

More than severance pay

Musk and investors may want a better deal

Musk’s reasoning for pausing a transaction may be similar: He might want Twitter to lower its selling price. Twitter shares fell more than 8% on Friday and are down about 23% from Musk’s agreed-upon purchase price of $54.20 per share. Part of the decline is tied to a general slump in tech stocks this month. The Nasdaq has fallen another 11% since the market closed on April 25, the day Twitter accepted Musk’s offer.

“This is probably a negotiation tactic on behalf of Elon,” Toni Sacconaghi, Bernstein’s senior research analyst, told CNBC’s “Squawk Box” on Friday. “The market has gone down a lot. Probably using the appearance of real active users as a trading ploy.”

Musk may feel pressure or obligation from other potential investors on Twitter to lower the price, even if the richest person in the world is more independent of the price.

Musk is in talks with outside investors to secure both equity and senior financing to reduce his personal stake in Twitter. While it can fetch a lower price for the social media company, returns could be higher for outside investors if and when Twitter returns to public ownership or is resold.

Why he might still try to bail out

Although he has said he remains committed to buying Twitter, Musk may be tempted to throw in the towel given the losses he’s incurring on paper when it comes to his stake in Tesla. Tesla shares are down about 24% in the past month.

If Musk thinks his Tesla losses are related to his acquisition of Twitter and are significant enough to potentially offset both the $1 billion termination fee and the additional damages he would be charged in court if he lost , he could decide to walk away.

But he would also have to deal with the reputational damage associated with breaking a deal. It’s not clear that any future company would risk selling to Musk with that track record.

Musk was not immediately available for comment.

Twitter may have to renegotiate

Just as Tiffany and LVMH finally settled, Twitter may not have many good options outside of renegotiating with Musk. The company would probably want to avoid a costly and protracted lawsuit. Employees could flee because the company does not have a clear plan for the future. Twitter is already cutting costs. On Thursday, it fired two executives and said it was suspending hiring.

When Twitter agreed to sell to Musk for $54.20, the board didn’t bother asking for a higher price, in part because there were no other interested buyers. at this price. Twitter’s board has come to the conclusion that it is not likely to return to higher levels soon given the fall in valuation this year of comparable stocks such as Facebook and Snap.

Twitter’s best bet might just be accepting a lower offer from Musk.

A Twitter spokesperson was not immediately available for comment.

WATCH: Elon Musk says he’s ‘still committed’ to Twitter acquisition

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