Is Elon Musk Playing 3D Chess With Twitter Or Just Negotiating?

Any trading decision on what Twitter (NYSE: TWTR) stock might be worth has to depend upon what we think of Elon Musk's bid. That, in turn, depends upon whether we think Elon Musk is playing 3D Chess here, or just negotiating. For there are three distinct theories – or hugely varying amounts of believability – as to what Musk is really up to.

Elon Musk has bid $54.20 for the 90% odd of TWTR stock that he doesn't already own. There are various other investors in Twitter stock who have agreed to follow him into a private company. Then there're the varied stories about how Musk is going to raise the equity and debt necessary to make the purchase. How much of his Tesla (NASDAQ: TSLA) stock is currently unpledged and available for such usage, what would be the margin calls, and so on.

Twitter stock is currently trading at around the $40 mark. So, clearly, the market as a whole and on average, does not think that Musk's bid is going to go through in its current form.

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So what is going on? One very fun but of very dubious value rumour is that Musk wanted to be able to sell out of some of his Tesla position. If he did that straight then that would collapse the TSLA stock price. So, have a story about buying Twitter and he can sell. Spending some $3 or $4 billion on TWTR is a very expensive way of achieving that. So perhaps just a fun invention there.

The second story is that Musk did mean to bid for Twitter but now that he's having a good look at the actual books he's having second thoughts. TWTR didn't need to show him anything other than the public accounts before he'd made a bid, the information released to him is making him think about withdrawing. This is, of course, very bearish about the value of Twitter stock going forward. Thus all this talk about the percentage of ‘bots and so on, ways out of the deal.

The third is simply that Musk is negotiating. There's an old story about “Would you do this for $1 million?” “Sure”. So, will you do it for $5?” “What do you think I am?” Well, we've established that, now we're just haggling the price. Musk has made enough of a bid to bring Twitter to the negotiating table. They've agreed that, at some price, they're willing to be bought. Excellent, so now we haggle about the price.

In this version of the story Musk's concentration on ‘bot percentages is just negotiation. Twitter has released that 5% number to the SEC. That makes it a formal number, one that if isn't true might enable Musk to walk away without paying the ($1 billion) breakup fee. Or, of course, it could be just more negotiation to bring down the price that might have to be paid.

For us as traders our valuation of TWTR stock will depend upon which of these three – or indeed any other – stories we believe about what Musk is doing here. Is he playing 3D chess in some manner, and Twitter isn't the point at all, or are we just seeing some negotiation over the final price?