Twitter stock sinks as Musk’s walking away kicks off a legal battle

Update: Twitter stock extended Friday’s sell-off and shed 11.25% to hit four-month lows at $32.55 on Monday. The shares settled the day at $32.67, erasing about $3.2 billion in market value. The slump in Twitter stocks was triggered last Friday after Elon Musk abandoned the $44 billion deal to acquire the company. Analysts predict Twitter shares to fall to $11, as Musk walks away from the takeover deal. Reports of a legal battle ahead also added to the weight on the stock price. Bloomberg reported Sunday that the social media company has hired law firm Wachtell, Lipton, Rosen & Katz LLP as it prepares to sue billionaire Tesla CEO Musk early this week. Additionally, the risk-off market profile, in the face of China’s covid lockdown woes and recession fears, collaborated to the downside in the Twitter share price.

Twitter (TWTR) stock is falling sharply in the premarket after Elon Musk abandoned his takeover plan for the social media network over the weekend. This comes as positive news to your author's portfolio as you will notice from the disclaimer below that I am short Twitter. Tesla (TSLA) is being boosted by the fact that this may mean one less distraction for Elon Musk and one less drain on his finances and pledged Tesla stock. His distraction levels may soon be ramped up as it looks like this one will end up in court. 

Twitter stock news

An SEC filing from Elon Musk's advisors was posted late on Friday outlining that Musk's advisors sent a letter to Twitter giving formal notification that Elon Musk is terminating the deal. 

"Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of multiple provisions of that Agreement, appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement, and is likely to suffer a Company Material Adverse Effect (as that term is defined in the Merger Agreement)", the filing reads. "Information related to Twitter’s process for auditing the inclusion of spam and fake accounts in mDAU. Twitter has still not provided much of the information specifically requested by Mr. Musk in Sections 1.01-1.03 of the May 19 diligence request list that is necessary for him to make an assessment of the prevalence of false or spam accounts on its website."

This has been a repeated source of ire for Musk as he has repeatedly mentioned the prevalence of spam accounts on Twitter. 

This one will end up in court in all likelihood, and already legal teams are being expensively assembled. According to Bloomberg, Twitter has hired Wachtell, Lipton, Rosen & Katz LLP and will file a lawsuit this week.

"We are confident we will prevail in the Delaware Court of Chancery," Twitter Chairman Bret Taylor said. 

Twitter stock forecast

We have been short this one pretty much since day one and outlined our case quite clearly. The deal always seemed too high, and with the credit and macro environments turning it meant funding was an issue. Elon Musk took several steps to rectify this situation. We wrote in early June not long after the deal was announced, "In any event, the risk-reward play is hugely weighted to the downside. On Thursday, I initiated a short position in TWTR to add to my already short TSLA. The take-out price for Twitter is $54.20, so there is limited downside to being short, just $4.20."

If the deal collapses, Twitter very quickly trades in the $30s. Noted tech analyst Daniel Ives from Wedbush has finally come around to my line of thinking! 

Technically, there is some support at $28.31.

Twitter chart, daily

The author is short Twitter and Tesla.

Previous Updates

Update: Twitter stock settled at $32.65 per share, down 11.40% on Monday. The slump was initially triggered by the news that Elon Musk abandoned the takeover deal, and was later exacerbated by a generalized dismal market mood. Global indexes edged lower amid higher-than-anticipated Chinese data and a new coronavirus outbreak that brought back the lockdown ghost. Concerns about skyrocketing inflation and slowing economic growth have weighed on high-yielding assets in the last couple of months, resulting in US indexes flirting with bearish territory. The Dow Jones Industrial Average shed 164 points, while the S&P 500 closed 1.22% lower. The Nasdaq Composite was the worst performer, down 262 points or 2.26%. 

Update: Twitter stock got knocked down 7.1% in the first hour of trading Monday, a feature of Elon Musk posting a filing late Friday that he was officially refusing to buy Twitter. The case now moves to the Delaware Chancery Court. TWTR stock is trading at $34.20 at present. Musk responded to Twitter's hiring of an all-star legal team from Wachtell, Lipton, Rosen & Katz by posting this meme: