London (CNN Business) – When Elon Musk announced his intention to buy Twitter nearly 90 days ago, the world and financial markets were different.
The S&P 500 was 14% higher and had not yet entered a bear market. The war in Ukraine and concerns about inflation prompted investors to sell, but sentiment did not collapse. Tesla, the electric car maker that is Musk’s main source of wealth, was about to report record earnings figures.
The mood on Wall Street and corporate America has changed since then. US stocks just closed off their worst start to the year since 1970. Tesla began laying off workers after Musk indicated he had a “very bad feeling” about the economy. The second half of the year seems uncertain at best.
In this context, Musk’s offer to pay Twitter $44 billion, and buy shares he doesn’t own at $54.20 per share, seems too high, and now of course he wants to get out of the deal.
“The market has changed dramatically since April,” Daniel Ives, strategist at Wedbush Securities tells me.
Musk took action late Friday to terminate the purchase agreement on Twitter, claiming the company was “violating multiple provisions” of the original deal.
For weeks, Musk has expressed concern, without any clear evidence, that there are more bot and spam accounts on the platform than Twitter has publicly disclosed. Analysts speculated that the spat was an attempt to create a pretext to exit a deal that now seemed exaggerated.
Musk’s bid represents a 54% premium to Twitter’s price before Musk began increasing his stake in late January, and a 38% premium before revealing his holdings in April.
In early July, Twitter shares were trading at just $38.23, down about 12% from the start of the year and about 30% below Musk’s bid price.
On the radar: Twitter’s stock would likely be much worse if Musk did not take this step. Investors have abandoned fast-growing technology stocks, which are less attractive when interest rates are rising, and social media companies have been hit hard.
Meta, from Facebook, is down nearly 50% so far this year. Snapchat is down 68%.
Then there is Tesla stock, which Musk planned to rely on in part to fund the deal. It’s also down a lot, down 30% since the beginning of April.
“Twitter’s failure has had a huge impact on Tesla’s stock and is Musk’s darling,” Ives said.
Musk does not consider this discrepancy to be buyer’s remorse. But Ives thinks it was clearly a major factor.
What will happen next: The stage is set for a long and intense legal battle. Twitter has said it intends to force Musk to close the sale, and it’s not hard to see why. Twitter shares fell more than 5% in premarket trading on Monday. With the acquisition looming in court, Ives thinks they can drop another 30% to $25.