Why Elon Musk Can’t Avoid Buying Twitter Even If His Bankers Are Bailing Out


When Elon Musk agreed to buy Twitter in April for $44 billion, he intended to improve the business by adding new features, fending off spambots and being more transparent about its algorithms. He secured the backing of a consortium of banks who agreed to loan him more than half of the total transaction price to take over the business.

But now Musk wants out, accusing Twitter of not giving him more information and what he sees as the company’s business prospects. Twitter is suing him to make the deal, claiming his reasons for walking away are excuses to shirk a financial commitment he no longer wants to honor. Its backers, meanwhile, are blocked.

Twitter says his deal with Musk clearly obliges him to do everything he can to finish what he started. Similarly, the banks that agreed to give Musk billions in loans to help him buy Twitter have signed legal agreements prohibiting them from simply walking away if they change their minds, legal experts say.

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“They’ve signed letters of engagement, so they’re basically engaged,” said Adam Badawi, a law professor at the University of California, Berkeley. Banks also have reputations to uphold. “Other companies wouldn’t want to work with them if they backed out,” he said.

Even if they find a reason to back out of the deal — for example, arguing that Musk’s flip-flop made the deal much riskier for them — Musk could be forced by a judge to find another. source of funding.

What role does debt play in Musk’s original deal to buy Twitter?

Musk is the richest man in the world, valued at $218 billion, according to the Bloomberg Billionaire Index, but even he doesn’t have $44 billion in cold hard cash under his mattress. It signed two deals with banks including Morgan Stanley, Bank of America and Barclays to lend a total of $25.5 billion. He has put up a significant portion of his own wealth in the form of Tesla stock as collateral, should he be unable to repay the loans. The rest of the deal was to be funded in cash, split between Musk himself and a consortium of hedge funds and sovereign wealth funds who then agreed to help him buy the company and would be co-owners if the deal is successful.

Spokespersons for Bank of America and Barclays declined to comment. A Morgan Stanley spokesperson did not respond to a request for comment. Musk did not immediately respond to a request for comment, nor did a Twitter spokesperson.

Before saying he wanted to exit the deal, Musk had increased the portion he would pay in cash, racking up $33.5 billion of the total.

Now that Musk says he’s ending the deal, the math could change for the banks that agreed to lend to him.

“Musk doesn’t want to own Twitter, the banks don’t want to fund it. We’re in this weird ‘Alice in Wonderland’ situation trying to force this guy to buy a company he doesn’t want to buy,” said University of Chicago Law School professor Todd Henderson. . “Would you fund a guy to own a business he doesn’t want to own?”

Why haven’t the banks already tried to bail out?

The banks are only required to fund the deal if it goes through, and many people don’t believe Twitter will be successful in getting a court to force Musk’s hand. A more likely outcome is that the judge at the Delaware Chancery Court, where the trial will take place, will force a compromise, forcing Musk to pay Twitter a hefty fee for causing him so much trouble, but ultimately letting him go, said said Carl Tobias, a law professor at the University of Richmond.

In this case, the banks will still receive a small commission from Musk for doing the work and they will have nothing left to lend him.

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There’s another reason they might be sticking with Musk for now — they want to stay on his good books, and claiming he’s acting in bad faith could jeopardize that. Musk is still the richest man in the world and will be in dire need of debt financing in the future, regardless of how things turn out on Twitter, Tobias said. “You want to keep his business if you’re a bank because I think it’s quite lucrative,” he said.

If the banks find a way out, does that give Musk a chance?

No, Musk’s deal with Twitter contains a clause that obligates him to enter into the deal even if his debt funding becomes unavailable.

“The fact that he canceled the deal might be some sort of violation in itself, but Twitter is going to say it’s your fault, not ours,” said Anthony Casey, a law expert at the University of Chicago.

In this case, Musk would have to pay the cash portion of the deal to Twitter’s investors, and then Twitter itself (now owned by him) would take on the debt itself to finish paying the former shareholders, according to Henderson.

Musk could also go to court to compel the banks to honor their agreement and lend him the money. If he didn’t want to, the court could even appoint a special representative to act on his behalf and sue the banks, Henderson said.

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Has this ever happened?

If Musk’s debt settlements become a factor in a potential settlement or lawsuit, it wouldn’t be the first time the funding has become a factor in a legal case over a merger deal. Last year, Delaware Chancery Court Judge Kathaleen McCormick, who experts say will preside over the Twitter case, oversaw a court case involving a private equity firm that tried to pull out of a deal to buy cake decorating supply company DecoPac on blaming the economic downturn caused by the pandemic. McCormick said the private equity firm acquiring DecoPac needed to move forward, even though it no longer had the seed funding to complete the deal.

“When they see bad faith behavior, they tend to dislike it,” Badawi, a Berkeley law professor, said of the Delaware court and its judges. “They tend to punish him.”

Why does Twitter want the deal done at this point?

The primary role of Twitter’s board is to serve its shareholders – the banks, pension funds, hedge funds and individuals who own its stock. Currently, shares of Twitter are trading at around $36, much less than the $54 a share Musk agreed to pay those shareholders to buy the company. If Twitter’s board of directors let Musk go, it would leave a significant amount of money on the table and could expose them to legal action.

The entire episode caused significant damage to the company’s reputation and morale, with Musk’s attacks stoking existing concerns about his business. The company’s stock price is likely to fall even further if Musk walks away altogether.

Many Twitter users and employees don’t want the company sold to Musk, whose other companies have faced lawsuits and complaints over the treatment of employees.

One of the founders of Twitter, Ev Williams, said that if he was still on the board, he would “ask if we could just let this whole horrible episode end”.

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