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Tesla stock drops after the Twitter deal

Tesla Inc.

TSLA -12.18%

shares recorded their biggest drop in one day in more than a year after founder Elon Musk said he would buy Twitter Inc.

TWTR -3.91%

in a trade of $ 44 billion.

Shares fell 12% to $ 876.42 and performed worst in the technology-heavy Nasdaq-100 index on Tuesday. The stock had its worst day since September 2020, falling 21% after being traded on the S&P 500 index.

The stock has now fallen around 23% since April 4, when Mr Musk first revealed a position in the company with social media. Mr. Musk’s takeover deal quickly collapsed, surprising shareholders and market observers. It also spurred volatility in equities on both Twitter and Tesla.

The acquisition adds to a list of high-profile ventures that Mr. Musk has been juggling over the last decade. For more than a dozen years, he has been at the helm of Tesla and the rocket and satellite company SpaceX in addition to launching startups on the site.

Twitter will now account for about one-sixth of his net worth, which is merged with his Tesla shares. About $ 60 billion of his Tesla shares – about a third of his holdings – are collateral for bank loans. Musk also needs $ 21 billion in cash, which could mean he sells some of his Tesla shares to complete the deal.

Sir. Musk appears to have a significant cushion before he will have to provide more collateral for the $ 12.5 billion in bank loans that were used to buy Twitter. His agreement with lenders indicates that he must provide $ 100 in Tesla shares as collateral for every $ 20 in loans, leading to a so-called loan-to-value ratio of 20%. That amounts to about $ 62 billion in Tesla shares to back the loans.

Sir. Musk’s agreement with lenders says that if the value of his loans in one day amounts to more than 35% of the collateral he has provided on the loans, he will face a margin call. He had to sell some of his shares, prepay the loans or provide additional collateral. He would reach that threshold if the value of the shares issued fell to about $ 36 billion, corresponding to a fall of about 43%.

This means that if the value of these Tesla shares fell by around 43%, he would face a margin call.

Elon Musk on Monday signed a deal to buy Twitter for about $ 44 billion, moving the world’s richest man one step closer to taking control of the social media platform. Photo: Ryan Lash / TED Conferences, LLC / AFP via Getty Images

The Tesla stock is notoriously volatile and is known for its gigantic one-day movements, fluctuations that have made the company a favorite bet for option traders who want to take advantage of the turbulence. Options on Tesla shares were traded broadly Tuesday: Traders had spent more money on bearish options that would typically pay off if stocks fell further than calls tied to a jump, according to Shift Search of Vesica Technologies.

Tesla’s shares had outperformed the wider market before Mr Musk revealed his share of Twitter. Shares had risen about 2% year-to-date until the end of March, while the S&P 500 had fallen about 5% and other hot technology stocks had fallen even more. The stock also got a boost last week when Tesla reported a record-breaking quarterly profit that managed to impress investors despite bottlenecks in the supply chain and disruptions in China.

Lately, things have turned around. Tuesday’s loss has dragged the stock down about 17% for the year compared to the wider market fall of about 12%.

Tesla has also faced increasing competition. Ford Motor Co.

‘s first all-electric F-150 pickup truck rolls off the assembly line on Tuesday, pushing the company’s steps toward electrification. Shares from other electric car manufacturers also fell. Rivian Automotive Inc.’s shares lost nearly 10%, while Lucid Group fell 8.7%.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

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