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Now that Elon Musk has a deal to buy Twitter and take it private, some retail stock pickers might be eyeing a quick buying opportunity in the social-media company before it leaves the public markets.
If the ultimate resting spot for Twitter’s stock is going to be $54.20 under Musk’s deal with Twitter, and the stock is currently near $50/share, doesn’t that pave the way to profit for someone who purchases a couple more shares before the closing?
Possibly, experts say — but be careful.
Twitter
TWTR,
shares were 2.8% lower at $48.29 in early trading on Wednesday after a rocky day on the markets on Tuesday when the Dow Jones Industrial Average
DJIA,
S&P 500
SPX,
and Nasdaq Composite
COMP,
fell as investors weighed earnings reports and potential recession worries. At Wednesday’s market close, Twitter shares closed at $48.64.
All three most widely followed indices were treading water early Wednesday. By the end of the day Wednesday, the Dow and S&P came out with slight gains, both up 0.2%, while the Nasdaq finished with a small loss, off less than 0.1%.
Shares in Tesla
TSLA,
where Musk is CEO, opened more than 4% higher at $913.98 on Wednesday after closing lower at $876.42 on Tuesday, against a backdrop of worry the world’s richest man is stretching himself too thin. Tesla stock closed Wednesday at $881.51.
In a five-day average that stretched from Tuesday, April 19, to Monday, April 25 — the date Musk and Twitter’s board said they had a deal — Twitter was the fourth-most actively traded stock among Interactive Brokers accounts. There was a “substantial net buying of calls over the past week,” noted Steve Sosnick, chief strategist at Interactive Brokers IBKR. (Tesla was the No. 1 most actively traded stock among Interactive Brokers accounts.)
There are good reasons why Twitter’s price discount is occurring, experts note.
“SEC filings reveal there’s a $1 billion break-up fee for either side should the deal fall apart.”
One reason is the chance the deal doesn’t go through. That could seriously sink the stock price — and a person’s portfolio in the process.
On Tuesday afternoon, Securities and Exchange Commission filings revealed there’s a $1 billion break-up fee either side could pay if the deal falls apart. The filing sets an Oct. 24 deadline for the acquisition, but allows for another six-month extension if regulators are slowing the process.
Still, Sosnick added, “even if you knew with perfect certainty that the deal would get done at $54.20, you would still not pay that price for shares today.” The discount is layering in various market considerations and hedges, he noted.
“Individual investors can express their own opinions about the probability of the deal’s closing and at what time it is likely to do so, but realize that there are professionals who do little else other than assess these variables,” Sosnick said. And those traders, he added, “are already heavily engaged in the pricing and positioning around the Twitter deal.”
“If you’re trying make a short, quick buck, you know what the end game is,” said Max Pashman of Pashman Financial in Los Angeles, Calif. — but it’s really not his “cup of tea,” he added. “It’s really just like day trading almost, making a play like this.”
Here’s what to keep in mind:
Where Musk, Twitter and its shareholders go from here
Musk reached a deal with Twitter’s board, where he’ll pay $54.20 a share. But now the company’s stockholders have to approve it, and it also has to obtain “regulatory approvals and the satisfaction of other customary closing conditions,” said the press release announcing the agreement. That’s all expected to happen by some point this year, the announcement said.
The timelines for sewing up major acquisitions can vary quite significantly, said Chester Spatt, a professor at Carnegie Mellon University’s Tepper School of Business teaching financial regulation.
What’s more, anything can happen during this period, he noted.
When buyers and sellers try working out deals in all sorts of transactions — whether it’s a house or a company — 11th-hour questions and concerns can sometimes arise that disrupt the deal. And that’s even putting aside all the public attention being currently heaped on Musk’s planned purchase, he said.
“‘I have to believe that the SEC would look very closely at any deal involving Elon Musk.’”
“If the deal doesn’t goes through, [the stock price is] not going be worth $50,” said Spatt, later adding, “There is a little element of political risk that’s out there.”
“The Twitter Board conducted a thoughtful and comprehensive process to assess Elon’s proposal with a deliberate focus on value, certainty, and financing,” Bret Taylor, Twitter’s Independent Board Chair, said in the Monday announcement. “The proposed transaction will deliver a substantial cash premium, and we believe it is the best path forward for Twitter’s stockholders.”
To be clear, Spatt, a former SEC chief economist, is certainly not forecasting a doomed deal that sinks Twitter stock. But he points out that there are many outcomes — some unforeseen — in the world of major acquisitions, and the markets understand that and hedged against it by not going all in.
The break-up fee in new SEC filings Tuesday underscore that fact. “The fee is highlighting that the parties recognize there’s some possibility the deal could come unglued,” Spatt said.
There’s Musk’s specific regulatory run-ins, like his settlement and fines from the SEC for his 2018 “funding secured” tweets.
“I have to believe that the SEC would look very closely at any deal involving Elon Musk,” Sosnick said.
Don’t forget about capital gains taxes
Putting aside any kind of regulatory concern or politician tough talk, the next thing to consider is the taxman.
Capital gains taxes assess either 0%, 15% or 20%, depending on household taxable income, when asset value appreciates and produces profits. More specifically, that’s the rate which applies when the owner holds the asset for at least a year before “realizing” or selling the gain.
If the owner buys and sells the asset within a year, the profits are taxed as ordinary income. That means it’s subject to the income tax brackets that run from 10% to 37%.
“If you buy Twitter stock now, and the deal closes in 2022, there will be a short-term capital gain at the higher rate on any profit.”
The Twitter shares will be “realized” for capital gains tax purposes at the time of closing, said Lisa De Simone, an accounting professor at the University of Texas’ McCombs School of Business.
If a person goes on a Twitter stock-buying spree now, and the closing occurs in 2022, there will be a short-term capital gain at the higher rate on any profit.
That’s a problem if investors pour those returns right back in the market without putting cash aside for taxes, said Sam Lewis, founder of SJL Financial in Wilmington, Del.
Taxpayers who end up facing more capital gains taxes — assuming the Twitter deal goes ahead — can plan to make estimated tax payments to the IRS, De Simone noted. That can minimize or avoid a chance at interest and penalties for paying too little in tax ahead of tax time, she said. If someone’s paid too much, they can always get the overpayment back in the form of a refund, De Simone said.
Beyond any tax fixes and glitches, there’s a deeper question about financial planning that Lewis said retail investors should consider if they are thinking about Twitter stock now.
“Is this in your long-term plan to make a short-term profit?” Lewis asked. He advises investors not to allow this to deter them from their long-term investing goals and strategies. And ultimately, experts advocate a key principle that applies to all trading: only invest what you can afford to lose.
