A $TWTR victory lap and some closing thoughts
Yesterday Elon Musk agreed to go ahead with his deal to buy Twitter. While my initial thought was to operate under Michael Myers from Halloween rules (don’t consider him dead till you see a body / don’t count the money till it’s in your account), with Elon tweeting last night about buying Twitter I am going to break my rule and consider this a done deal (though it is actually not done; as I’ll discuss later, TWTR premarket is trading for <$52, which actually implies this is far from done! But I think the endgame remains clear: Elon will eventually own TWTR and pay $54.20/share. I agree with The Chancery Dailty that TWTR is not going to let him Charlie Brown / Lucy them and will keep holding his feet to the fire until the money is in their account. There’s probably a few more days or even weeks of minor twists and turns, but the end game is now clear and Elon will own TWTR, almost certainly before the month is out).
This “settlement” was slightly unfortunately timed for me; next week’s post was going to be a Tegus sponsored deep dive of the TWTR / Musk case; I did several expert calls with lawyers / professors on the case and was going to post the results. I’ll likely still make the post for posterity’s sake.
But I *guess* that’s a small downside to what is a massive win. I have made a lot of mistakes in investing, both over my career and this year…. but TWTR makes up for many of them. This was the largest position I’ve ever taken, and I was extremely public about the position. We (as a firm) sent an open letter to Twitter right on the heels of Elon breaking the merger, I’ve said TWTR would win the case since the moment Elon tweeted “deal on hold” (with a more thoughtful follow up a few days later that predicted the clown car would have a happy ending), I said Twitter would likely be the best merger arb situation we’ll ever see, and I did two podcasts on the deal (one with Evan Tindell when everything was still in flux, and one with Compound and Ann Lipton when we had a better lay of the land). My podcasts are like my (hypothetical) children; I love all of them equally…. but I love those two just a little bit more than the rest. They were timely, informative, fun, and hold up incredibly well in hindsight.
So yes, this post is a minor (ok, major) victory lap. I apologize for that… Obviously, I’m thrilled by the outcome here, but more than that I’m really proud of the process. TWTR had enormous downside if this deal broke, and I heard from plenty of bears on the thesis (more on them in a second). But I had done a ton of work on this case, and I’d put my knowledge and understanding of it up against just about anyone’s. So the outcome is nice, but I’m really proud of the work that lead to the outcome and to taking such a big position.
Anyway, moving on from the victory lap, I wanted to do a few quick takeaways from this whole ordeal.
As I write this, TWTR stock is trading for ~$52/share, which suggests the market following my Michael Myers rule and not believing this is done until the cash is deposited. The market is clearly pricing in some “what if the financing bails risk” or “what if Elon’s being Elon and tries to back out” risk. I get the fear… but this spread is too wide. There are three options for closing at this point: it could close this week (if the banks waive their marketing period for the debt), it could close in two weeks (if the banks market the debt), or it could close in about a month (if Elon or the banks try to go back on a settlement / break this, we go to trial, and Elon inevitably loses). But, however we get there, all roads lead to Elon buying TWTR on deal terms at this point. The banks aren’t pulling funding, Elon’s not walking, and if I’m wrong on either of those points the courts will force them to fund / close anyway.
I heard from a lot of TWTR bears on the arb. All of them were convicted there was no way this deal would close on terms. Some of them thought Elon could walk for a $1B fee. Some of them thought 50% of TWTR’s users were bots so Elon could get out on that. All of them spoke eloquently, all of them spoke with confidence and certainty, and many of them were extremely rich / powerful / had great reputations…. and all of them were absolutely wrong. I don’t mean this in a “with the benefit of hindsight we can see they were wrong because the deal closed.” I mean that, in real time, they were just flat wrong on every issue they presented, and if they had spent any time reading through the contract and understanding the issues they would have understood that they were absolutely wrong. Instead they shot from the hip, and they did it with the supreme confidence. I generally wish losses and poor outcomes on absolutely no one, but given how confident all of these bears were that the TWTR deal would never close, I absolutely hope all of them had put their money where their mouths were and had short positions on TWTR. In fact, it would be strange if they did not, as all of them were absolutely certain this deal would never close.
That just leads me to a general takeaway with investing: you need to do your own work on every stock / company / issue. You can’t short cut any of the work by listening to someone else, no matter how smart / rich / powerful they are. If you had taken a single shortcut on Twitter, you would have been scared out of your position when they reported poor Q2 earnings, or when the whistleblower filings hit (though that was genuinely scary for a second), or at some other point. To get a big win here, you had to have done a ton of work, because once you did that you would see that there was just no way this case was a coin flip for Twitter to win (where the market had this priced for a long time) or even 65% for Twitter to win (roughly where the market had this priced until this week). On the facts as we knew them, TWTR was 95%+ to win this case.
I wanted to quickly shout out some people who did amazing work on Twitter. I just said you can’t shortcut doing your own work by listening to other people, no matter how smart / rich / powerful…. but I’d make an exception for these people and just blindly listen to everything they say (note: absolutely meant in jest / not financial advice!). In particular, I’d shout out Ann Lipton and The Chancery Daily. I talked to literally dozens of people on TWTR / Elon, ranging from arbs to lawyers to professors, and I can confidently say no one had as good a grasp on the case as those two. I cannot believe how much content they put out for free (and I do mean free; I believe both of them were just commenting on the case out of passion / joy of spreading knowledge and neither of them ever “played the arb” and took a position in TWTR); the arb community owes them a huge debt (my moment one subscription to TCD is just a drop in the bucket there!). Outside of those two, I’d note that Lionel Hutz’s substack was fantastic on TWTR; it’s free, you should definitely give it a follow (he had some late night thoughts on TWTR yesterday which I liked). And, on the investor side, I’d note that compound, Evan Tindell, and my partner Chris were all very vocal and very right on the story (Chris told me literally the moment Elon tweeted “deal on hold” that Elon had no shot in Delaware court). More than just being right, all three were right for the right reasons: they poured through the filings and came to the absolutely right conclusions (perhaps with some help from Ann and TCD!). Plus, Compound has consistently cracked me up with his tweets.
One more last second call out while I’m embarrassing my friends and myself. I’d add my friend Jeremy Raper in a separate category; Jeremy probably traded this the best of anyone, and out of everyone I talked to Jeremy was the one who did the best updating his analysis and position sizing throughout the trial. He published “go for the jugular” on Twitter just last week after Elon got embarrassed in court, and my position was much bigger because he was constantly pushing “if this is as good as you think and the facts suggest, swing harder”.
Speaking of Chris, in a May pod, Chris and I discussed TWTR before the infamous “deal on hold” tweet. The stock was at $48 and we said it was likely to close on terms and that the spread seemed too wide. Obviously a ton happened between that statement and today (the stock hit $34, we had a whistleblower, Elon tried to wiggle out of the deal, etc.), but the crux of that thesis was basically correct: Elon had signed an iron clad contract, and he would eventually need to close. We got emails from several people saying how awful that statement was in the wake of the podcast and the subsequent volatility / attempted deal break. I don’t point those emails out to spike the football on the call (even though that’s the whole point of this post!), but I’ve genuinely been wondering who was right: them to mock us, or us for saying the deal would close? Were they right because we clearly missed how crazy things would get? Or were we right because it appears the deal will close on terms? Both?
One thing the TWTR saga has enforced to me: you can get an edge in the market, but it takes a lot of work and is probably pretty rare. TWTR is and was, by far, the best merger arbitrage situation I’ve ever seen. But, on the heels of it playing out, I’ve been wondering 1) why I wasn’t even bigger in TWTR given how convicted I was and 2) given I’ve lost money on literally dozens of arbs in my lifetime where I’ve had less conviction and done less work, why I’ve ever played any of them? Just something I’m going to keep thinking about and working on: keeping powder dry and not swinging at “good” pitches so I can swing really hard at “great” pitches (like TWTR).
BTW- this doesn’t just apply to arbs. I’ve been wondering why I have any position where I don’t have the conviction and knowledge I did for TWTR. It’s just really tough to compare: TWTR was so black and white / binary (we either were right and would win in court, or we were wrong and Elon can walk). How can you have the same certainty on a value investment when there are so many other complicating factors? Again, a work in progress…. but going forward I’m going to try to hold myself to swing at less pitches and understanding the pitches as well as I did Twitter.
As I bragged earlier, I would put my knowledge of the TWTR / Musk case against literally anyone’s, but I definitely got some things wrong here. I had sold a ton of October $45 calls because I thought there was absolutely no way that Elon would cave / settle before trial. I know a ton of people who had sold a ton of $50 or $52.50 calls on the view that TWTR would take a decent settlement in exchange for certainty. Just shows how difficult gaming this stuff out is, and that trying to get cute on timing or improving your returns probably isn’t consistently doable. Start from the end (I think this deal will close on terms) and just chose the simplest trade that expresses that conviction!
A true story: I was so distracted by the news yesterday that I accidentally grabbed a Coors Light from the fridge instead of a sparkling water and drank half of it before I realized what I had done! It was ~2 PM, I haven’t had alcohol in months, and I had a workout planned for that afternoon. Not a great combo…. but I guess my subconscious was telling me I deserved a victory beer!
One point that I intentionally saved for last: Elon Musk is a controversial figure. Between Tesla and SpaceX, it’s unquestionable that he’s been a huge boon for humanity. But I don’t think there’s any way you could look at the fact pattern from this trial and find Elon to be a trust worthy figure in any way, shape, or form. This isn’t exactly a ground breaking revelation (the fake Solar City roof stuff comes to mind, as does some of the shenanigans revealed in Vance’s biography of Elon, and his TWTR account certainly…. well let’s just say there’s more than one red flag there!), but the TWTR saga just reinforces it to me. Elon signed a $44B merger almost on a whim (without any due diligence!), and within a few weeks he tried to back out for no reason when the market moved against him and he started to understand the enormity of what he’d done. He threw an entire company (and >7.5k employees) into complete chaos because he had buyer’s remorse, and, if you read all of the filings in the case, the most charitable interpretation you can give Elon’s actions throughout the trial is aggressive negotiating tactics that almost certainly crossed some ethical lines. Again, that’s charitable; I think there’s plenty of smoking guns here to argue that Elon constantly lied and withheld information that he legally needed to provide, and I would not be surprised if one of the reasons for settling now is to avoid a deposition where Elon would have been put under oath and likely destroyed / embarrassed himself.
For me, every time I’ve invested in someone unethical, I’ve eventually found that they’ve taken my money in some way. Sometimes it’s because they’ve taken huge risks and run the stock into the ground; sometimes it’s because they’ve simply taken all of money and turned it into their money somehow. Plenty of people have made fortunes betting on Elon. Tesla, SpaceX, etc. Good for them…. but Elon is permanently in my “unethical” list. Sure, you might make money investing with Elon…. but I’d suggest any money you make there comes from a “bad faith tail risk” that you're getting paid to underwrite, and one day that risk will almost certainly pay off…
One way that risk could pay off? Elon will almost certainly lose a bunch of money on TWTR…. but he could bail himself out by having TSLA buy TWTR in a few years. There’s precedent for this; Elon might publicly say TSLA didn’t bailout Solar City, but the finances suggest otherwise. Anyway, far from a certainty, but I wouldn’t be surprised if TSLA ends up owning TWTR in a few years.