August 10, 2022

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Why Elon Musk can’t stay away from buying Twitter even if bankers bail them out

Why Elon Musk can't stay away from buying Twitter even if bankers bail them out

Suspension

When Elon Musk agreed to buy Twitter in April for $44 billion, he had agreed In the field To make the company better by adding new features, fending off spam bots and increasing transparency about their algorithms. He got backing from a consortium of banks that agreed to lend him more than half of the total transaction price to take over the company.

But now Musk wants it, blaming Twitter for not giving him more information and what he sees as the company’s lackluster business outlook. Twitter is suing him to close the deal, saying the reasons he is stepping down are excuses for giving up a financial commitment he no longer wants to honor. Meanwhile, his financial backers are stuck.

Twitter argues that his agreement with Musk clearly requires him to do everything in his power to finish what he started. Likewise, the banks that agreed to give Musk billions of dollars in loans to help him buy Twitter have signed legal agreements that prevent them from simply pulling out if they change their mind, according to legal experts.

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“They signed letters of commitment, so basically they are committed,” said Adam Badawi, a law professor at the University of California, Berkeley. Banks have a good reputation that you must support as well. “Other companies won’t want to work with them if they back off,” he said.

Even if they find a reason to walk out of the deal — for example, by arguing that Musk’s change has made the agreement more risky for them — Judge Musk may be forced to find another source of funding.

What role does debt play in Musk’s original Twitter purchase agreement?

Musk is the richest man in the world, with an estimated value of $218 billion, according to the newspaper Bloomberg Billionaire Index, but even he doesn’t have $44 billion in hard cash sitting under his mattress. He signed two agreements with banks including Morgan Stanley, Bank of America and Barclays to lend a total of $25.5 billion. He put a significant amount of his own fortune in the form of Tesla shares as collateral, if he was unable to repay the loans. The rest of the deal was to be funded in cash, and Musk was to be split up and a consortium of hedge funds and sovereign wealth funds that later agreed to help him buy the company and would be a co-owner if the deal was successful.

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Spokesmen for Bank of America and Barclays declined to comment. A Morgan Stanley spokesperson did not respond to a request for comment. Musk did not immediately respond to a request for comment, nor did a Twitter spokesperson.

Before he said he wanted to pull out of the deal, Musk raised the part he wanted pay cashHe subtracted $33.5 billion from the total.

Now that Musk has said he’s done the deal, the calculus may change for the banks that agreed to lend him.

“Musque doesn’t want to own Twitter, and the banks don’t want to fund it. We’re in this weird ‘Alice in Wonderland’ situation trying to force this guy to buy a company he doesn’t want to buy,” said M. Todd Henderson, a professor at the University of Chicago Law School. “Would you like to finance a man to own a business he doesn’t want to own?”

Why haven’t the banks actually tried to bail out?

Banks are only in trouble to fund the deal should it close, and not many people believe Twitter will succeed in getting a court to force Musk. The most likely outcome is that the judge in Delaware Chancery Court, where the trial will take place, will force a settlement, causing Musk to pay Twitter a hefty fee to put her in a lot of trouble, but ultimately letting him walk away, he said. Carl Tobias, University of Richmond Professor of Law.

In this case, the banks would still get a small fee from Musk for doing the work and they would no longer have to lend him anything.

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There’s another reason they’re sticking with Musk for now – they want to stay on his good books, and arguing that he’s acting in bad faith could jeopardize that. Tobias said Musk is still the world’s richest man and will desperately need debt financing in the future no matter how Twitter’s situation ends. “You want to keep his business if you’re a bank, because I think it’s very profitable,” he said.

If the banks find a way to pull out, does that give Musk a chance to get out?

No, Musk’s agreement with Twitter includes a clause obligating him to move forward with the deal even if debt financing becomes unavailable.

“Canceling the deal itself might be a bit of a breach, but Twitter will say it’s your fault not ours,” said Anthony Casey, a legal expert at the University of Chicago.

In that case, Musk would have to pay the cash portion of the deal to Twitter’s investors, and then Twitter itself (now owned by him) would take on the same debt to finish paying the old shareholders, according to Henderson.

Musk could also go to court to force the banks to honor their agreement and lend him the money. Henderson said that if he didn’t want to do so, the court could even appoint a special representative to act in his place and sue the banks.

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is this happened before?

If Musk’s debt arrangements become a factor in a potential settlement or trial, it won’t be the first time funding has become a factor in a court case involving a merger agreement. Last year, Delaware Court Judge Kathleen McCormick, who experts expect to preside over Twitter’s case, oversaw a court case involving a private equity firm that attempted to withdraw from an agreement to buy a cake decorating supplier. decopack By blaming the economic downturn caused by the pandemic. McCormick said the private equity firm that acquired DecoPac had to move forward, even though they no longer had the original funding to complete the deal.

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“When they see bad faith behavior, they tend not to like it,” Badawi, a Berkeley law professor, said of the Delaware courthouse and its judges. “They tend to punish her.”

Why would Twitter want to close the deal at this point?

The main role of Twitter’s board of directors is to serve its shareholders – banks, pension funds, hedge funds, and the individuals who own its shares. Currently, Twitter shares are trading at around $36, well below the $54 per share that Musk has agreed to pay shareholders to buy the company. If Twitter’s board of directors let Musk go, it would leave a large sum of money on the table, and could expose them to shareholder issues.

The entire episode caused significant damage to the company’s reputation and morale in the workplace, as Musk’s attacks fueled existing concerns about its business. The company’s stock price would likely drop further if Musk walked away completely.

Many Twitter users and employees do not want to sell the company to Musk, whose other companies have done so Face lawsuits and complaints on the treatment of employees.

One of the founders of Twitter, Ev Williams, He said That if he was still on the board, he would “ask if we can let this whole ugly ring go off.”