Elon Musk’s Bid for Twitter Is a Machiavellian Play

On Thursday, market talk was dominated by Elon Musk’s bid for Twitter (TWTR) . I believe Musk will eventually own the company, one way or another.

Earlier this week, I wrote about Musk’s penchant for humor. Did you notice the reappearance of the number 420 in his $54.20 bid for Twitter? This is a reference to marijuana, and is apropos his “funding secured” tweet, in which he mulled taking Tesla private at $420.

I also wrote about Musk’s tendency to go all-in on his ideas, and that 9.2% or even 14.9% ownership of Twitter would be insufficient.

In a new statement, Musk has now indicated that he wants to take Twitter private. In other words, he wants it all.

Musk said his $54.20 per share bid is his “best and final offer” for the social media network. Musk also implied that he might sell his shares of Twitter if his terms aren’t met. It’s an all or nothing deal.

Let’s consider how this might play out.

Musk’s offer will not be accepted. Just over a year ago, Twitter was an $80 stock, so it’s unlikely that a buyout price of $54.20 would generate much excitement. Musk knows this to be true.

If Musk then sells his shares, the stock might drift back to the mid-$30’s. That’s where Twitter was trading prior to the initial news of the Tesla (TSLA) CEO’s interest in the company. This will irritate shareholders, who in hindsight will question why a deal with Musk wasn’t consummated.

If a market downturn should occur — the likelihood of which is increased in the current interest rate environment — we could see Twitter in the mid-to- upper-$20’s. If that happens, shareholders will be begging for a buyout at $54.20. In this scenario, that price could represent a gain of 100% for shareholders.

Of course, that $54.20 price would be off the table. At this point, Musk can either start buying shares again at a lower price, or come in with a lower bid.

On the other hand, if Twitter’s price moves higher, he could simply choose not to pursue the company.

I believe it would be a mistake to treat Musk’s bid for Twitter as if it were a typical M&A deal. While some may feel this bid is ill-advised from a business standpoint, we need to understand that typical business concepts are irrelevant in this case.

Musk has decided that he wants to own Twitter, and I expect that will happen at some point. If the above scenario unfolds, he might end up owning the social media company for even less than his current bid.

(Ed Ponsi is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders.)