• One Hat Research LLC

$TWTR: About 70% Probability of Specific Performance with Billions of Dollars Lost for Elon Musk

One way to calculate the probability that the Court of Chancery of Delaware will force Elon Musk and his special-purpose entities to close their agreed acquisition of Twitter, Inc. is to fit a simple probability distribution to the current stock price and put and call options and to infer the probability of a closing from the best fit.

This is easy to do. As of the morning of September 20, 2022, the best fit implies about a 70% probability of a close at $54.20 by the end of 2023. While hardly the sure-thing that some academic observers have suggested, these are strong odds, suggesting close to a 30% return from the current (as of September 20, 2022) TWTR stock price.

The problem for those betting on specific performance is the associated downside if specific performance isn't awarded. While there is about a 70% chance of enforcement of specific performance priced into current TWTR options and common stock, this leaves about a 30% chance of no such award, and the downside expected price under the same modeling is between about $12 and $16. Here are two possibilities (of many possible, depending on modeling assumptions) for that downside distribution of TWTR stock price at year-end 2023:

This is a possible downside for a trader going long Twitter.

But it also is a good look at why Musk wants out of this deal so desperately. Because with specific performance, the current prices are telling us that Musk is going to get something worth about $12 to $16 per share. Adding in the current debt, Musk is going to pay near $50 billion, all in, for a company that the market is currently saying isn't worth even $20 billion.

Pity the poor banks that have agreed to lend to Musk and become Twitter, Inc. creditors. More on that later.

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