The story of Twitter and Elon Musk, after playing out in the media for months, is now headed to the courts. Regardless of the outcome, the case will have a major impact on deal-making for years to come, affecting the way due diligence is conducted, transactions are structured, merger agreements are written, and disputes are litigated.
I’m not a lawyer or an investment banker (anymore), so I will leave to those experts the job of speculating on the final outcome. My role, as CEO of the world’s leading provider of financial training, is to teach financial market professionals how to understand and determine valuation, and to apply that knowledge in their business careers. And in that context, I believe investors have a lot to learn from the Musk-Twitter saga.
The main lesson is this: Investing is – and always will be – an exercise in valuation. Warren Buffet famously said, “Price is what you pay. Value is what you get.” Too many investors allow themselves to be distracted by M&A buzz and forget that timeless principle. I believe investment decisions must be made based on the intrinsic value of a business and its future prospects, as expressed in discounted cash flow and other analytical tools. Merger “fever” distorts the valuation picture by shifting the focus to what a company could be worth to a hypothetical buyer, rather than its fundamental value as an operating business.
Investors who bought Twitter shares back when Elon Musk first expressed interest, and were counting on receiving $54.20 per share in the deal, are now looking at a stock that recently has traded in the mid-$30s. Where it goes from here is up to the courts, or perhaps to a revised agreement between buyer and seller. But investors who bought TWTR during the deal-driven run-up may be facing substantial losses.
One doesn’t have to be a professional Wall Street analyst to do some basic research, look at a company’s earnings trajectory, and make an informed decision about whether an investment at the current price makes sense. A lot of stocks look cheap given the recent market downturn, and investors willing to brave an uncertain economic climate can undoubtedly find bargains – but their investing decisions should be made based on realistic valuations and not M&A hype and hope.
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Scott Rostan is Founder, CEO, Principal and Instructor of Training The Street, which has provided training and skills development in accounting, corporate finance, financial modeling, and valuation topics for finance professionals for more than 20 years.