Finance Monthly - August 2022

In case you might have missed the news, Elon Musk and his team of lawyers have stated their intention to withdraw Musk’s highly publicised bid to acquire Twitter, with the prospect of a long, drawnout legal battle now on the cards. This decision was, however, somewhat anticipated amid speculation that he was significantly over-paying for the social network. Musk’s original offer was a $43 billion purchase of Twitter at $54.20 per share. At the time, this was a noteworthy 38% premium above the trading price of ~$45.81 per share. In recent weeks, the trading price has been falling, and after the news broke the price action certainly didn’t inspire confidence, plunging over 10%, trailing below the 20-day moving average, and closing right on the lows of the day at $36.78. However, this slump in valuation is a pattern that has occurred within most US tech stocks since April. Twitter’s new share price of $33.50, down 9% at the time of writing, is arguably a more accurate reflection of the social network’s prospects. Generally speaking, Twitter’s sluggish stock performance isn’t solely in response to Elon’s whims. The economy is stalling globally and economic headwinds are becoming more severe. Twitter is also struggling to grow its user base, and some analysts have suggested that social advertising spending is likely to be cut, which Twitter relies heavily on for a source of revenue, as companies tighten their belts to grapple with the economic environment. But, according to the termination letter, one of the main reasons that Musk is pulling out is not due to Twitter’s recent stock performance, but instead due to the prevalence of bots on the site and doubts over Twitter’s ability to determine how many monetisable daily user accounts (mDAU) the social media network actually has. Twitter, however, insists that fewer than 5% of the stated mDAU are false or spam accounts. On top of this, Twitter’s recent firing of two high-ranking employees and a third of the talent acquisition team are cited within the termination letter. Under the terms of the merger agreement, the company must “preserve substantially intact the material components of its current business organisation.” Musk’s team claimed that the proper process was not followed. It’s also possible that Twitter’s valuation was ‘protected’ by Musk’s buyout price, which is important to note. Since the acquisition deal was announced, Twitter is currently trading down by roughly 20%. However, Snap is also facing similar issues, down notably more at around 57%. Investors should therefore take note of wider market movements and tech stock valuations when considering their investment strategy. Uncertainty around Twitter’s acquisition is likely to continue for the duration of any legal battle, and against the current economic backdrop, we’d expect to see investors exercise more caution, as we await to see whether Twitter’s share price can ride out the storm. Finance Monthly. Inve s tmen t 65

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