Elon Musk announced he his ending his deal to buy Twitter, but the social media company said it plans to enforce the agreement.
Jim Watson/AFP via Getty Images
If Elon Musk succeeds in ending his deal to buy Twitter , it could be a positive for Tesla shareholders.
The potential purchase of the social media platform has been an overhang for Tesla (ticker: TSLA) investors for weeks and Tesla stock has been underperforming the market.
Musk said Friday he is terminating the deal to buy the social media company, claiming it had breached the terms of agreement by refusing the provide detailed information about fake accounts on the site.
Twitter said shortly after the news emerged that it will fight to enforce the merger agreement.
Tesla, Musk and the law firm that drafted Musk’s letter to Twitter’s chief legal officer—Skadden, Arps, Slate, Meagher & Flom—didn’t immediately respond to a request for comment about the potential legal action.
If Musk succeeds in ending the deal, investors can expect Tesla stock to get back some of its underperformance.
Since Musk’s Twitter (TWTR) stake was disclosed in early April, Tesla stock has dropped about 34%. The Nasdaq Composite is down about 20% over the same span.
Some underperformance, relative to the market, might be expected. Tesla stock is more volatile than the overall market. Investors can expect shares to go up more than the market in good times and down more than the market in bad times.
But the span between Musk’s stake disclosure and today includes Tesla’s blow out first quarter earnings. Tesla earned about $3.20 a share. Wall Street was projecting closer to $2.20 a share. In a flat market, Tesla stock should have received some benefit for beating earnings estimates by that extent.
The market, of course, wasn’t flat. Recession fears rose, hammering many consumer discretionary stocks, including the automotive sector. General Motors (GM) share dropped about 25% between Musk’s Twitter stake disclosure and Friday’s close. Ford Motor (F) stock dropped about 30%. Parts giant Magna International (MGA) shares dropped 13%.
All together, Future Fund Active ETF (FFND) founder, and Tesla investor, Gary Black believes Tesla stock could see a 5% to 10% bump, relative to the market, if the deal is off.
Wedbush analyst Dan Ives put the overhang in dollar terms. He believes there is $100 in Tesla stock for the Twitter distraction.
A $100 rise from today’s levels would be about 13% for Tesla shares. Back when Musk’s stake was revealed, $100 would have been about 9% of Tesla’s stock price.
But even though Musk has cold feet, Twitter seems intent on closing the deal as originally designed.
“We are committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plan to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery,” Twitter stated in a news release.
Tesla stock was up 1.4% in after hours trading Friday. Twitter shares were down 7.3% at about $34.14.
At that price, Twitter stock is down 32% since Musk’s stake was disclosed compared with a 20% drop for the Nasdaq and 15% drop for the S&P 500.
With those numbers, maybe Twitter investors can take some solace in the idea that there doesn’t seem to be much more downside.
Write to Al Root at [email protected]
