David Einhorn’s Greenlight Capital returned 8.4% for the second quarter, taking its year-to-date return to 13.2% at a time when most other hedge funds languish with negative returns. In its Q2 letter to investors, Einhorn pointed out that they got their positive result despite being net long in a bear market.
Greenlight makes money in a bear market
He added that their long positions dipped, especially at the end of June, but their short positions fell even more, resulting in a considerable positive return. The fund did not add any significant new long positions during the second quarter as it is a bear market, and they are building dry powder for future opportunities.
However, Greenlight added a new long position in the top five in July. Einhorn says this is a short term investment and they have a full position. As a result, he broke his usual practice of waiting for the next term’s letter to discuss it.
The new long position is Twitter, which is equivalent to a short position in Elon Musk, given his attempt to walk away from the $44 billion bid he made to buy him. David has been criticizing Musk for years and he didn’t hold back in his second quarter letter.
Is Elon Musk above the law?
He noted that he did not write about Tesla
However, that is not yet the case, and Greenlight believes the view that Musk is above the law is now widely held. The Tesla chief agreed to pay $54.20 a share to buy Twitter in April, but then appeared 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 walking away from the deal to well under 5%, or the percentage of bots that might be on Twitter”.
Greenlight bets against Musk
However, it’s Musk, so Einhorn thinks many believe the law won’t apply. He pointed to the comment of a former judge who told CNBC that the court could exclude the Tesla chief from the deal because he would not abide by the judgment, which would embarrass the court.
He notes that others believe the court could rule against Musk, but Twitter may not be able to enforce the judgment. He added that many people view these results as acceptable or “just the way the world works,” but he hopes that’s not the case.
Greenlight Capital established a long position on Twitter at an average of $37.24 per share. The Greenlight chief sees $17 per share of upside potential if the social network prevails in court, forcing Musk to go through with his purchase. On the other hand, he sees potential downside of $17 per share if the deal falls through, so he’s placed 50/50 odds on something that “should happen 95%+ of the time.”
The law will apply to Musk in this case
David thinks the Delaware Chancery Court’s incentive is to follow the law and enforce it in Musk’s case with Twitter. He described the court as “the preeminent and most respected business court in the country”. However, if he lets Musk off the hook, it will lead to 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 alter the deal. Of course, the Delaware Chancery Court has been working on merger agreement case law for years, resulting in strong precedent and a clear understanding of buyers’ contractual obligations.
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 to precedent and enforce the law against Musk, and Einhorn thinks the risk-reward ratio she will have is attractive.
Michelle Jones contributed to this report.