In the last several weeks a lot of talk in social media and finance world has been been about Elon Musks intentions to acquire Twitter. Twitter is publicly traded company. Normally, to take control of such company big investors would just buy up just enough shares to put themselves into a decision making position. That's what Elon Musk did. He slowly accumulated a little over 9% of shares in a very short amount of time and became the largest stakeholder. Twitter board welcomed Elon and offered a seat on the executive board. Elon declined. He had a different idea.
He wanted to make Twitter a private company again. For some reasons unknown for most, Elon believes in order to make necessary changes to Twitter and implement improvements it must become a private company again. Elon publicly have expressed many times his disappointment at SEC. I don't know how much of his personal experiences with SEC influenced the idea of making Twitter a private company, but I would assume he doesn't want SEC oversight for whatever moves he is planning to make.
Elon Musk makes reasonable offer to Twitter to buy the shares at a premium price, while stating his offer is final and won't be negotiating the price tag. At the same time as the largest holder, he hints that he may have to reconsider his investment if the board declined his offer. In the early days after the offer was made many speculated that the Twitter board wouldn't approve such a deal. However, it didn't take too long for Twitter board to make its decision and announce that they agree to Musks terms and ready to sell Twitter.
As a continuation in Twitter acquisition drama, Hindenburg Research announced today that they are taking a short position on Twitter and they believe Twitter deal will be repriced. Usually, Hindenburg Research works on investigating and uncovering publicly traded companies that are engaged in scams and fraudulent activities. This report and their short position on Twitter doesn't seem to be part of their normal business. Twitter is a well known platform and a company. It is not engaged in scams or fraudulent activities. Yet, Hindenburg Research still sees an opportunity in making profit by shorting Twitter.
Unlike their other research reports, this one wasn't taken well by many, especially on Twitter. Many were even just laughing at their actions. Main reason those who disagree with Hindenburg pointing out is that risk/reward ration isn't just there to take such position. Even if short position ends up being a profitable one, it wouldn't be a lot so doesn't justify taking the risks.
Even though Twitter board was initially hesitant to take the deal. Now that markets are down and Nasdaq has plummeted, this deal does look great. And that is one of the points Hindenburg Research is focusing on. Since Nasdaq fell by 17.6%, that should mean the value of Twitter has dropped to and should be priced at around $31.40 per share. They continue explaining that if the Elon-Twitter deal was gone, the price of Twitter stocks would drop by 50%.
According to the deal, it looks like Elon Musk has an option to walk out of the deal by paying $1 billion dollar fee. This combined with market conditions and Twitter's weak quarterly results gives Elon a lot of leverage in renegotiating the deal at a lower price if he chooses to. What Elon will do is only known to Elon. While the research Hindenburg presents is interesting, it does seem like a risky move to short Twitter despite reasonable assessments they make.
Feel free to read the full report here. These are the outlines of their research and reasons why they are taking a short position on Twitter:
- Nasdaq Has Plummeted ~17.6%, Implying A Twitter Price of ~$31.40 Per Share Without a Deal
- Twitter Reported Weak Quarterly Results And Disclosed It Had Overstated Its Users (Again) Just 3 Days After Accepting Musk’s Offer, Suggesting Further Downside That Has Not Already Been Priced In, Should Musk Walk Away
- Musk Indicated He Will Sell His 9.2% Twitter Stake Should a Deal Not Consummate
- Hindenburg Research Believes The $1 Billion Breakup Fee Really An Option To Walk Away
- The Public Square Should Rest on a Foundation of Financial Stability, Not Risky Leverage
- The Board Has Virtually No Stake in Twitter. Key Holders Rolling Existing Equity or Contributing New Equity Would All Benefit From a Revised Deal
- The Overpriced Twitter Deal Is Placing Undue Pressure on Tesla, Due to Equity Sales and The Prospect of More Margin Debt
- The Risk/Reward Of Shorting Twitter
What do think about shorting Twitter? Is Hindenburg Research taking too much risk shorting Twitter?
I think it is a risky play. But since this topic attracts a lot of attention, this may serve as a great marketing tool for them and gain more audience. Especially if they turn out being right and Elon does try to renegotiate or try to walk out of the deal, it will earn them some good reputation, which may help with their future short positions. On the other hand, even if they end up being wrong and lose some money, they can still make up for such losses with their other short positions. I would assume they are careful with their positions, and as soon as market tell them they are wrong they will probably close the position in a timely manner without getting into too much loss.