Investors have been betting heavily on the outcome of the Twitter deal since Elon Musk offered to buy the social media company for $44bn in April.
The result has been anything but certain since the Tesla chief executive sought to terminate the transaction in July. But some big winners have emerged after Musk told Twitter on Tuesday that he intends to close the buyout at the agreed price of $54.20 per share, sending the stock price soaring.
In the intervening months, Wall Street’s deal experts had studied the transaction’s legal contract and previous tie-ups to assess whether Musk could walk away.
The overwhelming consensus was that Twitter was on solid ground. Virtually no one believed that Musk’s professed concerns over excessive fake accounts or a whistleblower alleging regulatory problems could be sufficient grounds for the billionaire to renege on the agreement.
The only surprise was that Musk caved seemingly without winning any concessions.
Over the past few months, billionaire activist investor Carl Icahn built a position of more than $500mn in Twitter, said a person familiar with the situation, after its share price fell below $40 on mounting investor uncertainty and fears of a protracted legal battle between the two parties.
Florida-based hedge fund Pentwater Capital Management built a position in Twitter of about 22mn shares but hedged it using put options, said a person familiar with the matter.
Icahn and Pentwater both stand to make hundreds of millions of dollars if Musk keeps his word and closes the takeover, said those familiar with the trades. Other large hedge funds such as DE Shaw also stand to earn big windfalls.
Musk and Twitter are in negotiations about how to tie up the loose ends and formalise a closing, with the Tesla chief executive stating he wants a formal halt to the litigation in exchange for taking the steps to get Twitter shareholders their cash.
Icahn said he never doubted the deal would reach this conclusion. “It is sort of simplistic. You could obviously see he wants this platform and in my mind, he very well could 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 is often missed.”
Whenever a large merger is announced, so-called merger arbitrage funds place bets that seek to profit from the deal eventually closing. There is usually a spread between the takeover price and the price at which shares are trading, reflecting both the risk that a deal collapses along with the cost of the trade until it completes.
In the days after the billionaire agreed to buy Twitter, the available return grew as investors priced in the prospect that Musk would not actually buy the company.
When Musk said he would back out of the takeover and Twitter’s share price tumbled, the arbitrage became a losing trade.
Some large hedge funds lost money for months before adding to their bets over the summer in the belief Twitter’s lawyers had negotiated an ironclad agreement that Musk would be compelled to close on.
“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 connotes a low-risk endeavour but Musk lives in an Alice in Wonderland kind of world.”
Hindenburg has placed two winning bets on Twitter, initially shorting the shares in May when it became apparent to them Musk would try to walk away from the deal after shares in both Tesla, his electric car company, and the social media platform started to fall. Having closed out that bet, the firm disclosed 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 firm sold all of its Twitter holdings on Tuesday, reaping huge gains that Anderson was reluctant to quantify but said he was “happy to be stepping off the rollercoaster”.
Others are staying in, more certain than ever that Musk will keep his word and pay the full $54.20 a share.