Greenlight Bets on a Twitter Win – Yahoo Finance
Hedge fund Greenlight Capital was founded in 1996 by value investor David Einhorn (Trades, Portfolio). The firm invests primarily in publicly traded North American corporate debt offerings and equities. Einhorn is famous for his successful short bet on Lehman Brothers in 2008.
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In his second-quarter 2022 letter to investors, which was released Aug. 1, Einhorn disclosed he invested in Twitter Inc. (NYSE:TWTR). The social media company is currently pursuing litigation against Elon Musk, who is also the CEO and largest shareholder of Tesla Inc. (NASDAQ:TSLA), to make good on his agreement to buy Twitter. As I wrote in my previous discussion on this subject, Musk has been trying to renege on the deal.
What's interesting about this development is Einhorn has a history with Musk's Tesla. In 2019 and 2020, he had a short position in the electric vehicle manufacturer. Einhorn ended up losing a considerable amount of money on that holding as Tesla continued to gain.
In his recent letter, Einhorn wrote:
"We havent written about Tesla (TSLA) since 2019, and, we wont break that streak now. Elon Musk is a different story .In 2019 we quipped: 'For now, the accepted reality appears to be that Elon Musk is above the law.' At the time we wrote it we were half serious, half joking. In fact, we thought the law would catch up to him at some point. But it hasnt. Rather, our quip that Musk is above the law has become a widely held belief."
In regard to Twitter, he went on to say:
"Which brings us to Twitter (NYSE:TWTR). In April, Musk agreed to buy TWTR for $54.20 per share. Then, in May, he appeared to change his mind. The case law on this is quite clear. If it were anyone other than Musk, we would handicap the odds of the buyer wiggling out of the deal to be much less than 5%, or the percentage of bots that might be on Twitter. But, it is Musk and therefore many believe that the laws again wont apply. One former judge on the Delaware Chancery Court (where the case is being heard) went on CNBC to speculate that the court might let him out of the deal because Musk wont respect the judgment, which would embarrass the court. Another variation is the court might rule against him, but TWTR might not be able to enforce the judgment. Apparently, many people either believe these outcomes are acceptable or, in the alternative, are just the way the world works. We hope it isnt so. Actually, we can do more than hope. We purchased a position in TWTR at an average of $37.24 per share. At this price there is $17 per share of upside if TWTR prevails in court and we believe about $17 per share of downside, if the deal breaks. So, we are getting 50-50 odds on something that should happen 95%+ of the time. We think that the incentive of the Delaware Chancery Court, the preeminent and most respected business court in the nation, is to actually follow the law and apply it here. If it lets Musk off the hook, it will invite many future buyers remorse suits. Cynical buyers might contract with targets and then use the threat of litigation and the resulting uncertainty to recut the deal. The Delaware Chancery Court has spent years developing case law relating to merger agreements. The resulting precedent and clear understanding of buyers contractual obligations has created a great deal of predictability in this sphere. It will be up to Chancellor McCormick to follow that precedent and protect the sanctity of the court. We like the risk-reward that she will."
Twitter is currently trading at about $43, so there is still an over 20% arbitrage opportunity between the stock price and the deal price. Einhorn obviously thinks there is a very high chance (according to him, 95% probability) of the deal being completed one way or another. Either Musk will be forced by the court to make good on the deal (there is a specfic performance clause in the purchase agreement) or he will settle with Twitter before the trial.
I agree with Einhorn that Musk's legal position looks weak. Musk's case appears to rest on his position that Twitter induced him to do the deal based on misrepresentation in its SEC filings that the number of "bots" (fake accounts) were around 5% of the total. Musk beleives its far higher and this was a "materially adverse development" that enabled him to rescind the purchase.
Since the bot issue was well known to all (the two sides differ on the numbers) and Musk did not choose to do any due diligence to verify the fact, the onus will be on him to prove the issue is serious enough to constitute a materially adverse development, which to me looks like a tall order.
Twitter looks like a high probability bet, so Einhorn should be able to recoup some of the money he lost shorting Tesla.
The trial is set to start on Oct. 17 and is expected to last a week. Chances are also good that Musk will settle before or during the trail and before the judgement. If either party loses, they can appeal to the Delaware Supreme Court and the buck stops there. But this case is very unlikely to get that far.
I think it is very likely this issue will be settled in Twitter's favor by the end of October.
This article first appeared on GuruFocus.
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