(Sept 15): Hedge funds including David Einhorn’s Greenlight Capital and Pentwater Capital Management are wagering that Elon Musk won’t get his way this time.
Musk, the world’s richest person and a renowned sparring partner with regulators over securities laws, is trying to back out of his agreement to buy Twitter Inc for US$44 billion. Several hedge funds have purchased stock, options or bonds, speculating that Musk will lose a trial scheduled to begin Oct 17 in the Delaware Chancery Court.
That could be a bright spot for a type of hedge fund having a tough year. So called event-driven funds, which often bet on mergers and acquisitions, are down 4% on average, according to research firm PivotalPath.
The law is clear, Einhorn told investors in a letter last month. And “if it were anyone other than Musk, we would handicap the odds of the buyer wiggling out of the deal to be much less than 5%,” he said.
The money manager, whose firm bought Twitter shares at an average price of US$37.24, dismissed speculation that the court would rule in Musk’s favour to avoid embarrassment should the man commanding a net worth of more than US$250 billion simply choose to ignore its decision.
“We think that the incentive of the Delaware Chancery Court, the preeminent and most respected business court in the nation, is to actually follow the law and apply it here,” Einhorn wrote.
An attorney for Musk and a Twitter spokesperson declined to comment.
Pentwater, led by Matthew Halbower, bought more than 18 million Twitter shares in the second quarter, making his firm the seventh-biggest owner with a 2.4% stake. He told CNBC in July that he expected Musk, who offered to buy Twitter for US$54.20 a share, to be forced to complete the purchase.
So far, the market appears to be supporting that view.
On Tuesday, when US equity markets plunged the most in more than two years, Twitter shareholders voted to approve the merger — and the stock was the second-best performer in the S&P 500, gaining 0.8% to US$41.74. While it hasn’t closed above US$44.50 since Musk first suggested in May that he might renege, some analysts and investors, including Einhorn, have said the stock would tumble to US$20 if the deal falls apart.
The idea that Musk, the chief executive officer of both Tesla Inc and SpaceX, could one day own Twitter took root in early April. That’s when he disclosed he had acquired 9% of the social media giant, making him its largest individual shareholder. Within weeks, the parties announced they’d reached an agreement. But less than a month later, Musk was threatening to pull out, accusing Twitter of understating the prevalence of bots on its platform. On July 8, he said he was terminating the deal.
Since then, Musk’s lawyers have pointed to allegations from whistle-blower Peiter Zatko, Twitter’s former head of security, saying “egregious deficiencies” in the company’s defenses against hackers and privacy issues meant that Twitter had breached the conditions in the merger agreement.
An article in the New Yorker this week said that after Zatko’s claims became public, his former colleagues were contacted by researchers, sometimes offering money for information on the cybersecurity executive. At least a few of the researchers were gathering information for investment firms with bets on the deal, according to the report.
Some investors and analysts suggest the parties could reach a settlement before the trial, with Musk paying closer to US$50 a share.
Carronade Capital Management, a US$900 million multi-strategy credit hedge fund, invested in various Twitter debt and equity securities, wagering that the deal will ultimately be done, either after a trial or through a settlement, according to people familiar with the matter. A representative for the firm declined to comment.
Kellner Capital’s Chris Pultz said Musk and Twitter might agree to forgo a trial for a discount of 10% to 15% from the original deal price.
“Anything more than that and the Twitter board may say they would rather take their chances going to court,” said Pultz, whose firm manages about US$250 million.
In April, when Musk brought in outside financing, including from fellow billionaires Larry Ellison and Saudi Prince Alwaleed bin Talal, Pultz acquired a small Twitter stake. When the stock plunged in July, approaching its low for the year, Kellner bolstered its position by 40%.
Cabot Henderson, a merger strategist at Jones Trading, said Twitter now has less incentive to accept a lower price because the company has been winning in pretrial hearings, making the odds of a settlement lower than he previously predicted.
“At this point, people are mentally preparing that this thing is actually going to trial now,” Henderson said. “It’s hard to sometimes parse through the posturing, but it does seem there’s been a real hardening of attitudes.”