Twitter Inc. and Elon Musk are digging in for what could be an epic legal battle over Musk’s decision to terminate his agreement to purchase the social media platform.
Shortly after Musk dropped his bombshell on Friday, Twitter Inc. TWTR, -6.02% chairman Bret Taylor vowed to take him to court in Delaware over the move. Bloomberg reports that Twitter and Musk have brought in legal heavyweights to represent them in court, with Twitter hiring merger-law experts Wachtell, Lipton, Rosen & Katz. Tesla Inc. TSLA, +0.21% and SpaceX Chief Executive Musk has reportedly hired Quinn Emanuel Urquhart & Sullivan LLP, who successfully defended him in the high-profile 2019 “pedo guy” defamation suit.
Wedbush cut its Twitter price target to $30 from $43, citing what it describes as a “code red” situation for the company and its board.
“For Twitter this fiasco is a nightmare scenario and will result in an Everest-like uphill climb for [Twitter CEO] Parag [Agrawal] & Co. to navigate the myriad of challenges ahead around employee turnover/morale, advertising headwinds, investor credibility around the fake account/bot issues, and host of other issues abound,” wrote Wedbush analyst Dan Ives, in a note released on Monday. “Today, Twitter’s stock will start to trade on a standalone basis with a valuation range that we view as $25-$30 being fair value based on its peer group and growth profile.”
Twitter shares fell 5.8% to $34.68 in premarket trading on Monday.
Ives predicts a “long and ugly court battle” in which Twitter’s fake account/bot issue will be scrutinized, casting a cloud over the company in the near term.
“The legal issues could last into 2023 and in the meantime Twitter is a public company that needs to navigate day-to-day operations with many challenges ahead with its stakeholders,” he added. “There is a separate debate that will rage around if Twitter or Musk has the edge going into Delaware court proceedings that likely kick off this week with the first shot across the bow.”
The analyst does not expect any other bidders for Twitter to emerge while the legal battle is playing out in the courts. Wedbush maintained its neutral rating on Twitter.
With Musk looking to terminate the deal, Twitter’s “nightmare scenario” is playing out, according to Truist Securities analyst Youssef Squali.
“The company is now likely to engage in a messy and prolonged court battle to try to force him to go through with the deal on the agreed-upon terms ($54.20/share, a $44B valuation), an unlikely scenario in our view,” he wrote, in a note released on Sunday. “This makes the investment case for TWTR hard to make at this point.”
Both parties are now in a high stakes/high risk situation, according to Squali. Potential outcomes include a settlement whereby Musk ends up buying Twitter at a material discount to the initial offer price, or Musk walking away but paying a breakup fee. “We believe a scenario whereby Musk terminates the transaction and walks away unscathed is highly unlikely,” Squali added. Truist has a hold rating on Twitter.
Benchmark analyst Mark Zgutowicz agrees that the courtroom battle poses major risks for Twitter. “Twitter’s board must contemplate the potential harm to its employee and shareholder base of any additional internal data exposed in litigation,” he wrote, in a note released on Monday.
“We suspect neither party wants a long, drawn-out legal battle,” he added. “We do believe Elon Musk ultimately wants to run Twitter and believe the best course of action for both parties is a compromise.” Benchmark maintained its hold rating on Twitter.
Following Musk’s move Stifel Nicolaus cut its Twitter price target to $30 from $54.20. Stifel has a hold rating on Twitter.
Of 34 analysts surveyed by FactSet, two have the equivalent of a buy rating on Twitter, while 31 have a hold rating and one has a sell rating. The average stock price target is $50.68.
Wedbush analyst Ives thinks that Musk’s decision to end the Twitter agreement could spell good news for Tesla’s shares.
“For Tesla’s stock this will be some relief rally as this situation was an overhang on the stock, but the Street is wary of the looming court battle ahead between Musk/Twitter Board,” he wrote, in the note released on Saturday. “From the beginning this was always a head scratcher to go after Twitter at a $44 billion price tag for Musk and never made much sense to the Street, now it ends in a Friday the 13th-like ending with Twitter’s Board set to vigorously fight this deal to the end in Delaware courts.”
Tesla shares rose 0.9% to $759.2 before market open on Monday.
As for Musk’s next move, Charles King, principal analyst of technology research firm Pund-IT, told MarketWatch that it’s hard to predict.
“A conventional reaction to such a colossal failure would be to take time for reflection and to determine to avoid future wastes of energy, money and reputation,” he wrote, via email. “But Musk is anything but conventional so nothing would surprise me.”