News of Elon Musk’s Twitter acquisition received a highly polarized response. As Twitter transforms into a privately owned company, current stockholders will be forced to give up their stocks… will it benefit investors in the long-run? What can investors do now before Twitter is completely taken over?
Everyone was shocked when Musk announced his plan to acquire Twitter for $44 billion on April 14. Although the deal is temporarily on hold, investors are starting to plan their next move. For current Twitter stockholders, this deal is good news in the long-run, as the high bid is an investment gain to current investors. However, Twitter stock values are currently highly volatile. On May 17, Twitter saw a 18.02% reduction of its stock price from that of May 12—a big fluctuation compared to the 1.56% increase seen in YouTube stocks. Thus, it may be best for stockholders to just wait it out until the deal is closed instead of trying to trade in this volatile market.
If Twitter becomes private, stockholders would no longer own part of the company. This means that Twitter will no longer be obliged to give regular business updates to its stockholders. Thus, Musk will be able to make unpopular changes to Twitter without worrying about stockholders’ opinions. The future of Twitter is going to depend heavily on Musk’s vision of Twitter as the digital town square where topics vital to humanity are being debated.
This is not to say that Musk will be able to do anything he wants. As a big company, it will still need to borrow an enormous amount of capital from banks. Consequently, Twitter still needs to be a profitable company that can pay back all the borrowed capital with interest. Thus, Twitter is likely to continue being a profit-maximizing company even after the acquisition—the extent to which Musk can change Twitter’s business model will be limited.
This means that there will likely be no immediate change in the functionality of the website itself. Therefore, Twitter would not lose any user base in the short run. But going private would mean that it would take more time for Twitter to liquidize their assets, since it can no longer sell stock to investors to get cash.
The deal is a big investment gain for current stockholders. With a payout offer of $54.2/share compared to the current share price of $49.11/share, this deal has a bid-ask spread of over $5. This is well over the usual $2-3 spread for big companies, such as the spread of under $2 when Disney acquired Pixar at $59.78/share over the original price of $57.57/share.
So what should current stockholders do right now? Well, not much. Stockholders can technically sue in court to block the deal. But this requires lots of time, money, energy, and the consent of other major stockholders. If there is an investor holding a majority of shares, they can also vote the deal down single handedly. But this hasn’t occurred yet despite the Twitter deal lingering for around a month, so there is little hope that the majority stockholder will change their mind soon.
Investors can still buy Twitter stocks. It may indeed be tempting to buy Twitter stocks right now because of the attractive 9% premium. But the deal is currently on hold. If the deal does not go through, stock prices will plummet, and investors who bought Twitter stocks will experience a loss. Moreover, buying a stock right before acquisition is generally not a good idea, as stock prices are very volatile. Right after Musk announced his plan of acquisition on April 14, Twitter stocks spiked up. But after April 25, its prices have been consistently declining. This volatility tells us that investors should just wait and see what happens rather than act instantly.
Even if the deal goes through, it may take a while to finalize the deal and remove Twitter from the stock market, which may reduce investment returns over time. This is very likely with the amount of controversy surrounding the deal.
We can still have hope for Twitter stocks—Twitter can go back to being a public company again anytime in the future. It all depends on Musk, the future owner to-be.
In sum, this complicated Twitter deal may potentially benefit investors in the long run. With the market currently in high volatility, current Twitter stockholders will just have to wait and see what happens. The relatively big bid-ask spread will let current stockholders enjoy a lucrative gain. Since Twitter will still be Twitter, its user base is unlikely to change in the short run. It is up to Musk to decide whether Twitter should remain private, or whether it should open up its stocks to investors again.
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