- Elon Musk's $44 billion deal to acquire Twitter hinges on the stability of Tesla's stock price.
- Musk has put up Tesla shares for collateral and is committing an additional $21 billion of his own money to the deal.
- Here's how much room Tesla stock has to fall before Musk has to add more money to the deal.
Elon Musk's $44 billion deal to acquire Twitter hinges on the stability of Tesla's stock price, and Tuesday's 12% decline highlights just how risky the deal might be for the world's richest person.
Musk has pledged Tesla shares to secure billions in dollars of loans from various banks to get the deal done, including $12.5 billion through a margin loan that's secured in part by his stock. That's in addition to the more than $20 billion of his own money he has committed.
But Tesla erased $126 billion in market cap during its sell-off on Tuesday, leading Musk to lose $32 billion in paper wealth. If Tesla's stock price continues to fall, he will be forced to put up more collateral to meet the margin loan requirements set by the banks that are lending to him to buy Twitter.
According to Bloomberg calculations, if Tesla's stock price falls below $740, Musk will be on the hook to add more money to the deal. And that could involve Musk selling some of his Tesla stake, or pledging more shares.
Near current prices, Musk has about $12 billion in unpledged Tesla shares that he can use to add to the Twitter deal. But if the stock fell below $740, "Musk wouldn't have enough to cover the full $12.5 billion," Bloomberg reported.
Tesla falling below $740 is not out of question, as it represents a decline of just 18% from current levels. The stock briefly traded below that on February 24 and traded between $500 and $800 for much of 2021.
Market participants seem to be growing worried about the potential for Tesla's stock volatility to derail Musk's acquisition of Twitter, as the spread between Twitter's current stock price and its deal price widens. Twitter is trading 10% below its buyout price of $54.20 per share.
And if Musk does close his deal for Twitter, the Tesla CEO will have to contend with annual interest payments of about $1 billion. That could eat into Musk's wealth given that Twitter is barely profitable and Musk has said he's not doing the deal for economic interests. "This is not a way to sort of make money," he said.
Ultimately, to gauge whether Musk will be able to pull off his buyout of Twitter, investors should monitor the volatility of Tesla's stock price as much as Twitter's.