Investors have been betting heavily on the outcome of the Twitter deal since Elon Musk offered to buy the social media company for $44 billion in April.
The outcome has been anything but certain since Tesla’s chief executive tried to close the transaction in July. But some big winners have emerged after Musk told Twitter on Tuesday that he intends to close the acquisition at the agreed price of $54.20 per share, sending the stock soaring.
In the intervening months, Wall Street deal experts had been studying the transaction’s legal contract and past ties to assess whether Musk could walk away.
The overwhelming consensus was that Twitter was on solid ground. Virtually no one believed Musk’s stated concerns over excessive fake accounts or a whistleblower alleging regulatory problems could be sufficient grounds for the billionaire to renege on the deal.
The only surprise was that Musk apparently caved without winning any concessions.
Over the past few months, billionaire activist investor Carl Icahn has built up a position of more than $500 million in Twitter, a person familiar with the situation said, after the stock fell below $40 amid growing investor uncertainty and fears of a prolonged legal battle between two parties.
Florida-based hedge fund Pentwater Capital Management built a position in Twitter of about 22 million shares but hedged it using put options, a person familiar with the matter said.
Icahn and Pentwater both stand to make hundreds of millions of dollars if Musk keeps his word and closes the takeover, people familiar with the deals said. Other large hedge funds such as DE Shaw also stand to earn large windfalls.
Musk and Twitter are in talks on how to tie up loose ends and formalize a shutdown, with Tesla’s CEO declaring he wants a formal halt to the lawsuit against taking steps to get Twitter shareholders their cash.
Icahn said he never doubted the deal would reach that conclusion. “It’s a bit simplistic. You could clearly see that he wants this platform and in my mind he could very well afford it,” he told the Financial Times on Wednesday.
“To be a successful investor you have to see the forest from the trees. You look at the obvious, which you often miss.”
Whenever a major merger is announced, the so-called merger arbitrage funds place bets that seek to profit from the eventual closing of the deal. There is usually a spread between the takeover price and the price at which the shares are trading, reflecting both the risk of a trade collapsing along with the price of the trade until it closes.
In the days after the billionaire agreed to buy Twitter, available returns grew as investors priced in the prospect that Musk would not actually buy the company.
When Musk said he would back out of the acquisition and Twitter’s stock price fell, the arbitrage became a losing trade.
Some big hedge funds lost money for months before adding to their bets over the summer, believing that Twitter’s lawyers had negotiated an iron-clad deal that Musk would be forced to close.
“Anyone who uses the term arbitrage for any deal involving Elon Musk is misusing the term,” said Nathan Anderson, founder of short selling firm Hindenburg Research. “It means a low-risk endeavor, but Musk lives in a world of Alice in Wonderland.”
Hindenburg has made two winning bets on Twitter, initially shorting the stock in May when it became clear to them that Musk would try to walk away from the deal after shares in both Tesla, his electric car company, and the social media platform began to fall. After closing that bet, the firm unveiled Twitter as its first public long position on the premise that there was little hope the billionaire could get out of the transaction.
The New York-based company sold all of its Twitter holdings on Tuesday, reaping huge gains that Anderson was reluctant to quantify but said he was “happy to step off the slide.”
Others remain more confident than ever that Musk will keep his word and pay the full $54.20 per share.