https://www.cnbc.com/2022/05/12/twitter-market-cap-has-dropp…
Potential upside : $45 → $54 = 20%
tecmo
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You are misreading, the market is saying the probability of the deal closing are going down.
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Potential upside : $45 → $54 = 20%
A day later , it’s:
Potential upside : $40 → $54 = 35%
There are 3 scenarios: Musk walks away (and the shares plummet, maybe to $30); Musk renegotiated a price : $44.20? $50? Who knows?
And third, he goes ahead and buys it at $54.20.
It’s become a very different equation to solve; definitely in the ‘too-hard’ pile for me.
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A day later , it’s:
Potential upside : $40 → $54 = 35%
There are 3 scenarios: Musk walks away (and the shares plummet, maybe to $30); Musk renegotiated a price : $44.20? $50? Who knows?
And third, he goes ahead and buys it at $54.20.
It’s become a very different equation to solve; definitely in the ‘too-hard’ pile for me.
I know it’s poor form to reply to one’s own post, but things have changed so much here, I’ll go ahead.
3 trading days later, it’s now:
Potential upside: $38 → $43 = 39%
More importantly, I have read a number of analyses that suggest that Musk cannot just walk away, despite the Texas rule that says you can get out of any contract by just saying the word ‘Bot’ 3 times. He may suggest that that’s what he wants to do, and try to get a better price, and he probably will get a better price, but Twitter’s board is in a strong enough legal position to insist on something fairly close to the original $54.20 price. Let’s call it $50, even if it doesn’t end in 420.
The ‘undisturbed’ price of Twitter, in the time since Musk started accumulating his stake on January 31st, was between about $32 and $38, averaging about $35. Given the correction in the values of unprofitable companies like Twitter, it might be at $25-30 now, if it weren’t for Musk’s recent involvement.
So here are my best guesses for 4 probabilities:
Original $54.20 price: 10%
Renegtiation with a firm Twitter board for $50: 40%
Renegotiation with a weak Twitter board for $44.20: 30%
Deal falls through, legal challenge fails, back to $28.75 (average of $25-30, sweetened $1.25 by Musk’s $1b in cancellation fees): 20%
All of these numbers are very approximate, but it seems to me that at a current price of $38, the market may be underestimating the likelihood of the Twitter board standing firm or of Twitter shareholders prevailing in court. Using the above numbers, I get an expected value of $41.50.
I guess it’s still in the too hard pile. But for fun, I think at the current $38 it might make a good bet, even if I would close it if the price got back up anywhere near $45.
dtb
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So here are my best guesses for 4 probabilities:
Original $54.20 price: 10%
Renegotiation with a firm Twitter board for $50: 40%
Renegotiation with a weak Twitter board for $44.20: 30%
Deal falls through, legal challenge fails, back to $28.75 (average of $25-30, sweetened $1.25 by Musk’s $1b in cancellation fees): 20%
That does sound like the best way to value these opportunities.
Usually guessing the probabilities isn’t this hard, though.
For those who REALLY want to get fancy:
The range of outcomes would appear to me to have a pretty bimodal distribution.
Decent chance of a bell curve of possible outcomes lower than today, decent chance of a separate bell curve higher than today.
And an unusually low chance of a flat price.
But the option market tends to assume that the most likely future price is today’s price.
You can wager against that assumption with something resembling a strangle or a short call butterfly, which should offer unusually good risk/return on this one.
Jim
(not doing this and not recommending it–just an interesting discussion)
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