David Einhorn’s Greenlight Capital generated a return of 8.4% for the second quarter, bringing its year-to-date return to 13.2% at a time when most other hedge funds are languishing with negative returns. In his second-quarter letter to investors, Einhorn emphasized that they achieved their positive result despite being net long in a bear market.
Greenlight makes money in a bear market
He added that their long positions plunged, especially in late June, but their shorts plummeted even more, resulting in a sizable positive return. The fund didn’t add any new material longs during the second quarter because it’s a bear market, and they are building some dry powder for future opportunities.
However, Greenlight did add a new top-five long position in July. Einhorn says it is a short-term investment, and they have a full position. As a result, he broke his usual practice of waiting until the next quarter’s letter to discuss it.
The new long position is Twitter, which amounts to a short of Elon Musk, given his attempt to walk away from the $44 billion offer he made to buy it. David has been critical of Musk for years, and he didn’t hold back in his second-quarter letter.
Is Elon Musk above the law?
He noted that he hasn’t written about Tesla
However, it hasn’t yet, and Greenlight believes the view that Musk is above the law is now a widely held belief. The Tesla chief agreed to pay $54.20 per share to buy Twitter in April but then seemed to change his mind a month later.
Einhorn notes that the law in such a scenario is clear. He adds that if it were anyone other than Musk, he would “handicap the odds of the buyer wiggling out of the deal to be much less than 5%, or the percentage of bots that might be on Twitter.”
Greenlight bets against Musk
However, it is Musk, so Einhorn believes that many think the law again won’t apply. He pointed to commentary from a former judge who told CNBC that the court might let the Tesla chief out of the deal because he wouldn’t respect the judgment, resulting in embarrassment for the court.
He notes that others think the court might rule against Musk, but Twitter might not be able to enforce the judgment. He added that many people see such outcomes as acceptable or “just the way the world works,” but he hopes that isn’t the case.
Greenlight Capital established a long position in Twitter at an average of $37.24 per share. Greenlight’s Chief sees $17 per share of potential upside if the social network prevails in court, forcing Musk to follow through with his purchase. On the other hand, he sees the potential for $17 per share in downside if the deal falls through, so he placed 50/50 odds on something that “should happen 95%+ of the time.”
The law will apply to Musk in this case
David believes the Delaware Chancery Court’s incentive is to follow the law and apply it in Musk’s case with Twitter. He described the court as “the preeminent and most-respected business court in the nation.” However, if it lets Musk off the hook, it will invite many more such lawsuits involving buyer’s remorse.
He explained that cynical buyers could sign a contract with potential acquisition targets and then use the threat of a lawsuit and uncertainty to change the deal. Of course, the Delaware Chancery Court has been working on case law pertaining to merger agreements for years, resulting in a strong precedent and clear understanding of the contractual obligations of buyers.
As a result, there should be a significant amount of predictability in such a scenario. However, it will be up to Chancellor McCormick to stick with the precedent and enforce the law against Musk, and Einhorn thinks the risk/reward that she will is attractive.
Michelle Jones contributed to this report.