The protracted, will-they or won’t-they storyline of Elon Musk’s bid for Twitter, which turned into a legal battle with the social-media platform, took another big turn Tuesday.
He will buy the company after all — and at the original $44 billion offer price, which equates to $54.20 a share.
But retail investors might do well by stepping off that ride for now, financial advisers told MarketWatch.
Musk, the world’s richest man and Tesla’s
CEO, is now planning to press ahead with his original deal for the social-media company.
“Those considering buying a stock of a company before it’s expected to get acquired should expect volatility and should be taken on by investors with a high-risk tolerance,” said Danielle Miura, founder of Spark Financials in Ripon, Calif.
The potential breakthrough would mean Musk would buy the company at the original offer of $54.20.
A letter from Musk’s lawyers to Twitter
contained in an SEC filing, said he intended to proceed with the deal. Twitter shares rose over 22% on Tuesday — Twitter’s second biggest percentage gain in one day. In after hours trading on Friday, shares were at $49.18, below Musk’s offer price for the company.
“‘Those considering buying a stock of a company before it’s expected to get acquired should expect volatility.’”
— Danielle Miura, founder of Spark Financials in Ripon, Calif.
In July, Twitter sued Musk in Delaware Chancery Court to force him to go ahead with the acquisition after Musk looked to undo the deal pointing to concerns, most notably the prevalence of bot activity on the site. A five-day trial date was scheduled to start Oct. 17.
Even if the deal for Twitter at $54.20 a share seems closer today than yesterday, financial advisers still have a message to everyday investors who think they are spotting an opportunity: Think really hard first.
This past year — even the market performance in September alone — might have weakened the stomach for potential losses as the stock market keeps testing new lows for the year.
The Nasdaq Composite
is down approximately 28.5% year-to-date. The S&P 500
is down more than 20% in that time and the Dow Jones Industrial Average
is off roughly 18%.
“‘I would still say to not buy it. Obviously, this is getting a lot of attention, but I think the story is far from over.’”
— John Bovard, owner of Incline Wealth Advisors
“We received the letter from the Musk parties which they have filed with the SEC. The intention of the company is to close the transaction at $54.20 per share,” a Twitter spokesperson said Tuesday.
Nothing’s assured here, Miura said. “Until Twitter has been fully acquired, there’s a possibility that the deal may fail or the approval drags out longer than expected; if this happens there’s a chance that the stock price may drop.” Think long-term growth opportunities “rather than trying to time the market.”
“I would still say to not buy it,” said John Bovard, owner of Incline Wealth Advisors. That’s the same advice he gave clients when news of Musk’s bid for Twitter first emerged in early spring. “Obviously, this is getting a lot of attention, but I think the story is far from over.” Musk “makes quick decisions and brash decisions and changes his mind pretty frequently.”
But if there are people dead set on allocating some cash for a speculative play, at least apply some guardrail, Bovard said.
That means applying a stop-loss order, which triggers sales when a share price touches a certain point, in order to protect downside. It also means using a sell-limit order, which prompts sales at a certain point, to avoid hanging on too long after an upswing.
Considering the stock’s volatility even within one trading session, “if you not watching, you could be left stuck with the stock with a huge drop.”
“‘Deciding whether or not to buy Twitter stock right now all depends on where it opens once trading starts again.’”
— Carlos Legaspy, president and CEO of Insight Securities
“Deciding whether or not to buy Twitter stock right now all depends on where it opens once trading starts again,” said Carlos Legaspy, president and CEO of Insight Securities, a broker/dealer and investment advisor. “Musk’s offer was at $54.20, any price below that would be what is called a ‘deal discount.’ With someone as volatile as Musk, that deal discount has to be significant because there is always the possibility that he backs out again, and proceeds with the trial.”
Considering a slim “deal discount” of around 6%, given Twitter’s share price on Wednesday morning, Legaspy said, “The market seems a bit skeptical about the deal closing. At this level, it is probably a good idea to take profits as 6% upside seems too low for the risk.”
If anyone wants to put any money into Twitter now, Jamie Ebersole, founder and CEO of Ebersole Financial, also urged caution. The spread between the $54.20 number the current stock price “indicates there is still a fair amount of skepticism about getting this deal done.”
A small portion for a Twitter play could ultimately generate a nice return if the deal is carried out — if that actually happens, Ebersole said.
“So, the overall risk-return ratio is not great, and the market continues to price the deal as if there were significant risks to it being completed. That being said, for a diversified investor with a high risk appetite,” it could be a “decent opportunity to take some money” from Musk.
If anyone really wants to roll the dice, any single-stock position shouldn’t exceed 2% of their liquid net worth, said Kevin Brady, vice president of Wealthspire Advisors.
When it comes to Twitter, “my reaction is honestly the same compared to any single-stock purchase — it is and remains a gamble.”