I have invested in over a dozen arbitrage deals in the past, but none of them are like this one, where an individual is making the acquisition. This individual is Elon Musk, the wealthiest man in the world.
Despite losing $46 billion on paper this year, Elon Musk can still acquire with currently $11 billion in cash.
The most significant portion (and the easiest to sell) would be his $107 billion in Tesla. According to the latest SEC filings, Elon Musk has already secured $33.5 billion out of the $44 billion.
He can easily borrow the rest against his shares of Tesla (even if the shares are down 38% from all-time high) or SpaceX. The problem is not really in Elon Musk being unable to make the acquisition but instead in his ability to walk away with a mere termination fee of $1 billion. Twitter might even file a lawsuit asking for a more significant walkaway compensation, but it is still something that Elon Musk will be able to pay. Hence, the most considerable risk with this deal is Elon Musk changing his mind.
For the time being, his main issue is with the vast number of fake accounts.
We can only put a probability that the deal goes through at 50% with expected returns of 8% in a year.
It might look like a good deal with the 35% spread and only 20% loss (assumption) if the deal fails, but holding the stock is risky because there is such a high probability of failure. If the deal fails, what's the exit scenario? Is Twitter a good stock to hold long-term?
Twitter has been unable to sustain positive cash flows over the long term. And with the high stock-based compensation, the owner's earnings are even negative.
According to my calculations, the intrinsic value of Twitter is only around $9.3 billion. Elon Musk is overpaying for Twitter, and the market is overpaying for Twitter.
Not all arbitrage opportunities are worth investing in because if the deal doesn't go through, you will end up holding a business that is not worth it.
An arbitrage deal that I'm currently making is Activision Blizzard. Even though I believe that the market is overpaying for the stock, if the deal fails, the price might be attractive enough for me to build a good position. That's why I'm investing in it.