Twitter (TWTR) shares slumped 10% at the U.S. market open on Friday, returning to the $40 level where they were before Elon Musk had disclosed his initial 9% stake at the beginning of April. The world's richest man has placed the $44 billion deal on hold, citing doubts about the amount of spammers and bots on Twitter. He later added that he's still committed to the acquisition. 
The potential retreat isn't coming as a surprise to everyone. Throughout the biggest M&A saga of 2022, shares in the social network company never got close to Musk's $54.20 offer level, reaching their narrowest discount of 5% at the end of April. By the time Musk tweeted about his hesitation, the discount had already widened to 20%. By contrast, similar deals since 2005 had spreads of 2-4% a month after being announced, according to Pitchbook data.
``Musk’s announcement is the latest upset in a highly volatile merger story that’s rife with risks for investors,'' Morningstar’s Chief U.S. Strategist Dave Sekera said. ``One Twitter post can instigate a wave of selling pressure.''
Meanwhile, Twitter's peers in the tech sector have been caught in a tailspin, raising concern that Musk may be over-spending. Adding to the uncertainty is that Musk's motivation to buy Twitter isn't entirely economical, so this deal won't necessarily follow the same patterns as typical buyouts, according to Sekera.
Will Musk Still Buy Twitter?
High-profile skeptics of the deal include short seller Hindenburg, who described the offer level as too high on Monday. Disclosing a short position in the stock, Hindenburg cited a high risk that Musk will pay the $1 billion break free or re-price the entire deal at a much lower level. Its founder Nate Anderson couldn't hold back his glee at Friday's news:
Anderson's indictment of Musk's plans included weak quarterlies and yet another admission that user numbers had been overstated. ``As indicated by Musk, the platform is flooded with bots, spam, and scam accounts that likely inflate its genuine user metrics even further,'' Hindenburg wrote four days before Musk put his takeover on hold.
What is the Outlook for Twitter's Stock Price?
The short seller sees serious downside for Twitter's stock if Musk walks away. Selling pressure from Musk's promised stake sale if no takeover takes place, the wider Nasdaq's 17% slump since talks started, and Twitter's weak results means that if the deal fails shares could fall by as much as 50%, Hindenburg wrote in its letter.
Musk's deal isn't off the table, but the road ahead is marked by uncertainty. Trading on the likelihood of a successful outcome, or merger arbitrage, is fraught with downside risk and only a few percent of upside potential, Sekera cautioned in a May 6 note.
``There's good reason for most people to leave this strategy to the professionals,'' he wrote. “Merger arbitrage is like picking up pennies in front of a steamroller”.
Not All Gloom
There may be a winner in Friday's setback to the Twitter takeover: Analysts have been warning that Musk is stretching himself too thin between his pursuits of an automotive revolution, a Mars colony, cyborgs and the world's definitive social network. Tesla (TSLA), which has lost ab out a third of its value since Musk disclosed his Twitter stake, was among the best-performing U.S. stocks on Friday, rebounding by 7%.
``There's definitely some positive sentiment around Tesla today, as some shareholders will breathe a sigh of relief after worrying that Musk may dedicate too much time managing Twitter instead,'' Sekera said.
