July 14, 2022
TradeUP Thursday
Latest news and bulletin updates
Market Trends
Dow Jones  up
S&P 500  up
(Opening price as of 07/14/2022 compared to last close)
Weekly Highlights
#1 Inflation remains high in June, boosting chances of 100-bps hike in July
#2 Biden administration committed to bring down the price of gas
#3 JPM earnings fall by 28% as bank builds reserves
#4 Tech giants announce layoffs in preparation for recession
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Musk Pulls Out, Ending Bid for Twitter Buyout 

Last Friday, Elon Musk finally announced that he was terminating his acquisition of Twitter. The break-up has come after several months of contention between the billionaire and the social media platform. Back in late May, Musk began casting his doubts about the buy-out; he declared that Twitter had mis-presented to him the percentage of fake accounts the platform registered in its user base and blocked his team from access to its data.

Twitter, however, is not taking this lying down. On Tuesday, the company began the anticipated legal proceedings to battle Musk in court for the acquisition. In the filed complaint, Twitter scathed the billionaire, writing “Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away.” While the social media platform could have taken the $1 billion cancellation fee written into the contract, it appears that it is set to fight to enforce the merger agreement at the contract price and consummate the deal.

Legal experts generally agree Twitter has the stronger case in court. Musk terminated his agreement by claiming the obfuscation of bot accounts was a “material adverse effect (MAE).” However, experts view the precedence set by the Delaware legal system (where the lawsuit will be decided) as considering MAEs unforeseen, dramatic events that do significant harm to corporate performance. Musk also stated that Twitter breached the contract by firing two executives- a claim thought by legal professionals to be the most convincing. It will still be difficult to prove this event is serious enough to damage Twitter. If Twitter desires to avoid a lengthy legal battle, they may also settle with Musk at a lower purchase price or for compensation. 

Nevertheless, a potential judgement could be years in the making and would cost both sides billions of dollars regardless of the outcome. The best end result for Musk is the $1 billion penalty discussed above on top of legal expenses. This conclusion would also de-lever the $22 billion of Tesla stock Musk planned to use as collateral for the deal, which would relieve short pressure on the billionaire’s standout holding. For Twitter, all resolutions seem unfavorable. If the deal is terminated, whatever indemnity they gain seems scant compensation for a weakened share price, major human resource disruption and management resignations. If it is enforced, they will be owned by the man they just sued.

While the approaching lawsuit looks to be detrimental to all sides, one party in the deal can be seen as having dodged a bullet. The banks underwriting the debt portion of the acquisition were facing steep losses in excess of buyout fees as credit markets tumbled with the rise in interest rates since April. These financial institutions raised a $13 billion cash package to aid Musk’s Twitter bid. As the acquisition is confirmed, this temporary financing would have been converted into capped high-yield bonds and loans sold to investors. For every level of financing involved, market interest rates have outpaced the set caps, and the bonds would have been forced to sell at an aggressive discount.

Who will prevail in the Twitter legal battle? When will a conclusion to the acquisition saga be reached? 
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Inside Scoop

#1. Inflation remains high in June, boosting chances of 100-bps hike in July

• Inflation rose by 9.1% in June, led by costs for gasoline, groceries, rent and dental care. Biden admitted that inflation is unacceptably high while also calling the numbers out of date. 

• Fed officials could weigh historical 100-bps hike after the inflation report, and 75 bps is now also in play for the September meeting.

#2. Biden administration committed to bring down the price of gas

• Biden will push for greater oil output on his Mideast trip when he meets Gulf leaders in Saudi Arabia this week. Meanwhile, the Biden administration will continue the release of oil from strategic petroleum reserves and work with companies from the oil and gas industry to increase production.

• Treasury Secretary is working to build international support for a plan aimed at countering inflation and limiting Russian revenue. Yellen said that she discussed a Russian oil price cap with the Chinese vice premier Liu He during a virtual call last week.

#3. JPM earnings fall by 28% as the bank builds reserves for bad loans and suspended buybacks

• JPM earnings fell short of analyst expectations in revenue, net income, investment banking and trading revenue.

• The company has also built reserves for bad loans by $428m and it led to a drop in company’s YoY net income by 28%. In comparison, JPM released a $3bn pandemic reserve last year.

• Dimon warned of a global economic recession. However, he also pointed out that combined debit and credit card spending was up 15% with high demand in travel and dining. It indicated that online sales will underperform in 2Q22, and the coming earnings season will focus on possibilities of recession.

#4. Major tech giants announce layoffs or hiring freeze in preparation for potential recession conditions

• Tesla is laying off 229 data annotation employees and is shuttering the San Mateo, California office, according to a California regulatory filing.

• Microsoft announced a layoff of 1% of its workers, saying it will make hires in other areas.

• Meta reportedly asked managers to identify people for layoffs.

• Google is slowing down hiring for the rest of this year.

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