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 man looking at his laptop and thinking.
International Stock News

Why Alphabet stock was sliding today

Let's take a look.

Read more »

A man looking at his laptop and thinking.
International Stock News

Nvidia's stock was down despite its amazing earnings. Here's what history says is coming next

Although it might seem to defy logic, it's not an uncommon phenomenon.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Nvidia share price slips despite 94% revenue growth

Q3 earnings beat expectations, but what about guidance?

Read more »

high, climbing, record high
International Stock News

Could the S&P 500 Index hit 6,500 by the end of 2025?

Could the index climb higher?

Read more »

a small child holds his chin with his head on the side in a serious thinking pose against a background of graphic question marks and a yellow lightbulb.
International Stock News

Is it too late to buy Nvidia shares?

Is Nvidia stock a buy ahead of its third-quarter earnings report tomorrow?

Read more »

a group of people stand examining a large glowing cystral ball held in the hands of one of the group members while the others regard it with various expressions of wonder, curiousity and scepticism.
International Stock News

Here's what to expect from Nvidia on November 20

Can Nvidia score another win?

Read more »

Two people lazing in deck chairs on a beautiful sandy beach through their hands up in the air.
International Stock News

2 no-brainer Warren Buffett stocks to buy right now

While replicating Buffett's success isn't possible, there are a handful of his investments that are no-brainer buys.

Read more »

A man with a beard and wearing dark sunglasses and a beanie head covering raises a fist in happy celebration as he sits at is computer in a home environment.
International Stock News

3 reasons to buy Nvidia stock before November 20

This week marks a big moment for tech investors as perhaps the most anticipated earnings of the year will be…

Read more »