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explainer

Last week, Elon Musk struck a deal to buy Twitter for roughly US$44-billion, but that arrangement could still fall apart.

A big factor in whether or not that will happen is Mr. Musk’s main business, Tesla, which lost over US$125-billion in value after the Twitter deal was announced. That loss had partly to do with investors’ concerns about where Mr. Musk would focus his attention after the acquisition.

It also had to do with investor expectations that he would have to sell billions of dollars worth of Tesla stock to help fund the deal. (It was later revealed through regulatory filing that he did indeed sell approximately US$8.5-billion worth of Tesla stock.)

It’s important to note that the deal has a US$1-billion break fee, which Mr. Musk would be obligated to pay if he wanted to walk away. Paying that amount and abandoning the acquisition could cause Tesla’s share price to rebound, which might be good for him. But he is on record saying he does not care about the economics of the deal.

In this video, we’ll look at these factors and more, including what will happen next if the deal goes according to plan.

Shares of Twitter ended last week shy of $50, just under 10 per cent below Mr. Musk’s announced offer price of $54.20. Twitter remains a publicly traded company if and until the transaction closes, which is expected to be between three and six months from now, according to Twitter’s chief executive, Parag Agrawal.

If you think buying Twitter shares now will give you a guaranteed return in six months: the deal hasn’t closed yet and the difference between the current price of Twitter shares and the deal price reflects the market’s estimation of the risk it never will close.

If all goes according to plan and Mr. Musk buys Twitter, you’ll get $54.20 in cash for every share you own and the shares will disappear from your account. But it’s 2022. It’s normal to expect the unexpected.

Preet Banerjee is a consultant to the wealth management industry, founder of MoneyGaps.com, chair of FAIR Canada, and partner at Wealthscope.


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