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How a contrarian bet against Elon Musk netted a small fund a big payoff

October 10, 2022, 10:50 AM UTC
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Illustration by Fortune

Good morning, Term Sheet readers. Finance editor Lee Clifford here, filling in for Anne and Jessica.

There have been gallons of ink spilled on who has ‘won’ or ‘lost’ in the drama-filled journey that is Elon Musk’s pursuit of Twitter. But now, some real financial winners and losers are emerging. 

My colleague Shawn Tully not only got the exclusive on how much Carl Icahn has made betting on Twitter stock, but he also goes deep with a smaller investor in a new piece for Fortune, digging into the arbitrage strategy employed by the fund Bireme. Excerpts are below but you can read the full piece here. Shawn writes:

You’ve probably read about how such big hitters as Carl Icahn’s Icahn Enterprises, Dan Loeb’s Third Point and D.E. Shaw cleaned up when Elon Musk did a shocking about-face, and agreed to purchase Twitter at his original bid. But as a case study in why purchasing Twitter stock after Musk tried to exit and the shares tanked presented a such great arbitrage opportunity, it’s fascinating to study the reasoning of the two money managers who virtually wagered their small fund on the deal’s outcome, and won big time. Ryan Ballentine and Evan Tindell met in the early 2000s at MIT, where Ballentine captained the hockey and lacrosse teams, and Tindell captained tennis as a three-time All-American. Tindell even tried his hand at professional poker before the pair aimed at goals and aces playing stocks by starting Bireme Capital in 2016.

Bireme manages a portfolio in the $50 million range, mainly for individual investors, but Ballentine and Tindell give the ball a special spin by running it as a hedge fund. They specialize in finding situations where “cognitive biases” cause a stock to sell either well above or far below its fundamental value. Cognitive bias is a term from behavioral finance, the discipline positing that investors frequently make irrational decisions for reasons of comfort, habit or emotion. 

Ballentine and Tindell first bought Twitter when Musk posted his infamous “deal on hold” tweet on May 13. Until that date, Twitter was selling at a modest discount to Musk’s $54.20 or $44 billion offer. But over the next four trading days, its shares cratered from $47 to $37 as Wall Street saw a high probability the deal wouldn’t happen. As investor pessimism grew, Bireme bought more. Ballentine and Tindell re-loaded in early July after Musk’s letter to Twitter’s board pulling the offer sent shares to $33, and made their final purchases in late July after Musk filed counterclaims that in their view, revealed no new facts to strengthen his case. Although they declined to specify their holdings, Ballentine disclosed that the buys totaled well above $10 million, and that their investors have reaped “several million” in gains at Twitter’s price of roughly $51 at mid-morning on October 6.

Ballentine and Tindell based their conviction that Twitter would beat the world’s richest man on tangible evidence, the record of the Delaware courts in requiring buyers to honor purchase contracts and close on mergers. “People who thought Musk would win didn’t understand the Delaware Court of Chancery and how these cases are adjudicated,” says Ballentine. “The franchise of the Delaware courts is that they demand that contracts be enforced. Musk couldn’t tell the court to go away the way he summarily ignored the SEC. Being a scofflaw wouldn’t work in Delaware.”

One potential source of tension going forward?

“The lenders desperately want out of this deal,” says Tindell. He notes that interest rates have risen sharply since they committed to low-cost financing months ago, meaning they’d face big underwriting losses, and that the deterioration in Twitter’s business makes it a credit risk. Technically, Musk could escape from the deal if the creditors depart. But the contract stipulates that they can only walk if Twitter is insolvent, and its condition is far from that dire. Plus, evidence that Musk has prodded lenders wouldn’t fly with the Judge, Kathleen McCormick, who in a previous case forced a buyer to perform after it conspired to kill its financing as a way out. “The banks appear locked in, but even if they somehow managed to escape and it were proven that Musk pushed them, the court could demand that he close by substituting his own billions for the loans,” says Tindell. 

Just goes to show, the ‘wisdom of crowds’ is sometimes just plain wrong, at least when it comes to investing.  

See you tomorrow,

Lee Clifford
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Jackson Fordyce curated the deals section of today’s newsletter.


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