Twitter vs Elon Musk: Can Parag Agarwal do a Raj Gupta?

Making deals in the rush of an adrenalin when markets are booming, and coming to regret it when the tide turns is  routine in the corporate world. But what is less common is trying to wriggle out of the deal, once you realise your folly. But, this too, has happened before, somewhat similar to the way it is playing out in the Elon Musk-Twitter deal. In this context,  Twitter CEO Parag Agarwal would do well to take the  leaf of the book of another Indian American CEO – Raj Gupta.

Who is Raj Gupta?

Raj Gupta is the former CEO of speciality chemicals company Rohm and Haas. In 2008, he had been successfully leading the company (which was in its 100^th year then) and was slated for retirement soon, when in June of that year he struck a deal to sell Rohm & Haas to chemical giant Dow Chemicals for $18.8 billion. As per the deal terms. Dow agreed to acquire Rohm & Haas for cash at a price of $78/share – a premium of 74 per cent to the price on the day prior to the deal announcement.

But the things turned sour. Few months down the line, Lehman and AIG had collapsed. Credit lines across the world froze. Stocks tanked, including that of Dow Chemicals. To add salt to wound, a deal with Kuwait Petroleum, that Dow Chemicals was depending on to fund the deal, collapsed. Dow had planned to spin off some of its global business into a 50:50 JV with Kuwait Petroleum, and was to receive $7.5 billion as part of the deal. However, in December of 2008, following the collapse of the global economy and oil prices which stressed the finances of Kuwait, the JV was cancelled by the Kuwait government, leaving Dow in the lurch. Dow shareholders bore the brunt as the share price fell from $35 on the day of the deal to $6 by March 2009.

Pressure and negotiation

As Dow put the deal on hold and failed to close it by deadline, Rohm and Haas filed a suit in the Delaware’s Court of Chancery (same court where Twitter is planning to sue Elon Musk) seeking enforcement of the deal. While applying legal pressure, Raj Gupta also deftly kept the negotiations going on with Dow Chemicals. After having built the company as its leader over the last decade, an acrimonious deal failure was the last thing he wanted at the time of his retirement.

Thus, both the companies were fighting in the courts, negotiations to avoid a protracted legal battle were going on simultaneously. Finally, a compromise was arrived at with some innovative solutions. Dow agreed to complete the deal under most terms similar to the original one, including the price. However, as part of the revised terms, two of Rohm and Haas’s biggest shareholders would infuse $2.5 billion into Dow that would reduce its financial burden in completing the deal and enable it to avoid its credit rating getting downgraded to junk status.

Twitter’s way forward

Having agreed to Elon Musk’s offer originally, albeit in a haste, the Twitter management and the Board now has no choice to but to fight hard to get the deal done. As we had noted here ( tinyurl.com/2rxbepvp ), the Twitter Board’s quick surrender could have been avoided. But, now having taken that path, not following through will make things for Twitter more chaotic as many decisions have been made by all stakeholders in the last few months under the assumption the deal is going to proceed.

Thus, Parag Agarwal and company would do well now to fight hard in court and negotiate smart simultaneously on the table. He could use this as an opportunity to negotiate innovative adjustments to the deal, while at the same time using it as a opportunity to strengthen the position of other Twitter stake holders for the long term.

Meeting somewhere in the middle would be in Elon Musk’s interest as well. Aborting a take-off after speeding beyond a certain velocity will damage the plane. Elon Musk is well past take-off velocity on the Twitter deal and needs to be careful in attempting to ground it. Walking away recklessly from the deal would scare his reputation for ever. For the rest of his active corporate life, counterparties in deals with him or his companies would be wary of him and trust him less. Thus, this could prove to be more costly for him in the long run than going ahead with a Twitter deal in some fashion. Further, with a lot at stake for Tesla in China, with a significant part of Tesla’s valuations being driven by its operations based there, the Chinese government would be taking note of this. At some time, if breaking some rules with Elon Musk is convenient to them, they would go ahead and Elon Musk will fall short of sympathisers at that time.

Will Parag Agarwal set the playbook for future dealmakers left in the lurch? Time will tell!

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