Elon Musk is buying Twitter. Is it time to sell?

Trying to profit in the short term could backfire.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Twitter (NYSE: TWTR) surprised Wall Street this week when it announced it had entered into an agreement to be acquired by billionaire Elon Musk, a move that would make the company private. With the acquisition price about 8% higher than where the stock is trading Tuesday morning, some investors may be tempted to try to profit from this delta. But investors should think twice before they play this game.

This deal comes with some serious risks and a good case can be made for selling Twitter stock today.

Important details you should know

Twitter announced Monday that Musk would buy the social media company for $54.20 per share in cash, valuing the company at about $44 billion. The move would take the company private, meaning shareholders would be paid cash at the time the deal is closed and Twitter shares would no longer be traded on the New York Stock Exchange.

The company seems excited about the deal. "The Twitter Board conducted a thoughtful and comprehensive process to assess Elon's proposal with a deliberate focus on value, certainty, and financing," said Twitter Chairman Bret Taylor in a press release. "The proposed transaction will deliver a substantial cash premium, and we believe it is the best path forward for Twitter's stockholders."

As Twitter notes, the purchase price represents 38% upside over the stock's closing price on April 1 -- the day before Musk's 9% stake in the company was disclosed.

But don't forget to acknowledge the risks to this transaction. The biggest thing investors who currently own Twitter stock (or those considering buying it) should know is that there's never a guarantee that an acquisition will be completed, even when the company being acquired has already entered into a "definitive agreement" with the acquirer.

Twitter, of course, was sure to disclose the risks to this transaction, noting that it is "subject to the approval of Twitter stockholders, the receipt of applicable regulatory approvals and the satisfaction of other customary closing conditions."

What could happen if the deal falls through

There's significant risk to holding. If the deal does not work out, Twitter shares could plummet. After all, the stock's recent gain is almost entirely due to the likelihood of Musk buying the company at a price of $54.20 per share. Without this possible deal, and without the promise of Musk's leadership, the stock could spiral downward as investors contemplate what a failed deal could mean for the company's future.

It's worth noting that all we know about the deal's timing is that it is expected to close sometime this year. There are eight months left in the year. Would the risk of holding during that period really be worth just an 8% premium to today's price? Probably not.

It’s also worth noting that since this isn't a company buying Twitter, there may be a lower risk of any potential antitrust issues. Further, the financials behind the deal may be simpler -- and the parties easier to deal with -- than if this were a merger between two companies as opposed to a buyout buy a billionaire. Nevertheless, such a large deal from a single person is uncharted territory and could pose unforeseen risks. So investors should tread carefully when considering the probability of this deal closing.

All of this to say, a strong case can be made for selling Twitter stock today. And to those thinking of buying Twitter stock today, there’s good reason to stay on the sidelines. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Twitter. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

The US election is done and dusted. Is now the time to buy the ASX NDQ ETF?

US stocks continue to march higher this week.

Read more »

A financial expert or broker looks worried as he checks out a graph showing market volatility.
International Stock News

Why is everyone talking about the VIX Index today?

Fear or greed: Which investor sentiment will prevail today?

Read more »

A young kid with dark glasses rocks out with a guitar.
International Stock News

Why Nvidia stock rallied to a new all-time high on Wednesday

The changing of the guard bodes well for the artificial intelligence (AI) chip specialist.

Read more »

A handsome smiling man sits in the front seat of an electric vehicle with his hands on the wheel feeling pleased that the Carsales share price is going up and the company will shortly pay its biggest dividend ever
International Stock News

Why Tesla stock just skyrocketed

Why is Donald Trump's election victory powering explosive gains for Tesla stock?

Read more »

Man holding up betting slip and cheering along with two friends in front of TV
International Stock News

Elon Musk's big gamble: Will Tesla stock plunge if Kamala Harris wins the election?

The Tesla CEO has been an outspoken advocate for GOP presidential candidate Donald Trump. Will it backfire?

Read more »

Four investors stand in a line holding cash fanned in their hands with thoughtful looks on their faces.
Economy

Up 20% this year. Does the S&P 500 Index have more in the tank for 2024?

Will US stocks hold up after the election?

Read more »

two young boys dressed in business suits and wearing spectacles look at each other in rapture with wide open mouths and holding large fans of banknotes with other banknotes, coins and a piggybank on the table in front of them and a bag of cash at the side.
International Stock News

2 magnificent S&P 500 dividend stocks down 27% to 51% to buy and hold forever

These stocks hold potential to act as growth and income plays.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
International Stock News

One Wall Street analyst thinks this emerging Artificial Intelligence stock could rise 60% in the next year

SoundHound AI is on the doorstep of a big year.

Read more »