Elon Musk offered $54.20/share for Twitter and reached a deal with their Board. The price of a share of TWTR is now about $48.58.
It was reported today that Musk's fee for exiting the $44B deal would be a mere $1B (2.27% of the price). So if something happened that changed Musk's opinion of the firm's value by that much, such as a tech stock meltdown or loss of users, he might be better off paying the $1B and just walking away. "It's not about money" my arse.
Furthermore, Musk is margining his Tesla shares to finance the deal. If TSLA crashes, such as during a tech stock meltdown, he will be on the line to post additional collateral or funds. If he can't do so... deal dies.
Thus the market is not pricing TWTR shares at $54.20, it's setting the price somewhere between the $39ish price prior to the announcement (plus $1B in market cap from the termination fee) and $54.20, with the implied odds of the deal oscillating all the time.
It seems stockholders are pricing in a binary outcome here: Let's say $40/share or $54.20/share. If you back into the odds that would cause these two outcomes to be worth $48.58 you're looking at an estimated 60% odds that the deal will happen and 40% that it won't.
That's a gross simplification of course, because if the deal does not happen TWTR could go under $40. Why might the deal not go through? Because of the same tech stock collapse that could cause the deal not to happen! So maybe a tech stock collapse is the 3rd variable here - or maybe it's the only one.
If we change the binary outcome to $25 in the event of a tech crash, and $54.20 in the event of a buyout, the odds change so that the market at these prices is expecting about an 81% chance for the deal to go through. Thus, a long position in TWTR is kinda like a bet that the odds of a tech stock crash between now and the acquisition is less than 81%.
TWTR put options might help insure against some market risk elsewhere in one's portfolio. The $40 strike price puts for August 19 are $1.44. If the deal goes through, they're worthless, but if not a 5X or more return is not out of the question.
It's not an airtight hedge, because a tech crash could occur AND the deal could go through, but the opposite could also occur, and that's a decent amount of leverage. It's hard to imagine a world where the deal falls through AND tech stocks do well, so if you're holding QQQ maybe some TWTR puts offset some of your market risk through this rate-tightening cycle?
