“If you look a the case law, you see that only once has a buyer been able to break a deal via an MAE, and that was Musk’s principal position,” notes Ballentine. But Ballentine and Tindell didn’t think Musk’s claims remotely proved an MAE. He argued that the multitudes of fake customers undermined its value so severely that they constituted a Material Adverse Effect that empowered him to scrap the deal. Musk insists that Twitter was hiding its practice of allowing millions of “bots” and spam accounts on its platform. Being a scofflaw wouldn’t work in Delaware.” Musk couldn’t tell the court to go away the way he summarily ignored the SEC. “The franchise of the Delaware courts is that they demand that contracts be enforced. “People who thought Musk would win didn’t understand the Delaware Court of Chancery and how these cases are adjudicated,” says Ballentine. People assumed that would be the case in this dispute.”īallentine 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. “They looked at his history, and saw a big public face who always got his way. “People looked at Musk, this genius in the public eye, as someone who told the SEC to buzz off and got away with tiny fines,” says Ballentine. “It was all about the glaring light and deafening noise around the transaction, and not about rational analysis.” What misled investors, he says, was Musk’s image as a winner, and his vaunted reputation for escaping trouble. “It was ‘cognitive bias’ in spades,” says Ballentine. Although they decline 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.įor the pair, the doubts that drove Twitter’s shares into the mid-to-low $30s didn’t come close to matching the real odds the deal would close at the original price. 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. As investor pessimism grew, Bireme bought more. 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. Until that date, Twitter was selling at a modest discount to Musk’s $54.20 or $44 billion offer. As Ballentine put it, “We like situations where people push a stock much too high or much too low for non-economic reasons, anticipating that the economic reasons always win.” Why the Twitter drama was a clear case of mis-pricingīallentine and Tindell first bought Twitter when Musk posted his infamous “deal on hold” tweet on May 13. In behavioral economics, it’s what’s called “the bandwagon effect,” where the more people who keep praising a stock or product, the more people get captivated by the growing excitement and join the herd.
They also observes Saylor’s flamboyant salesmanship has tricked investors into vastly overpaying for the stock. Ballentine and Tindell reason that its shareholders way over-value MicroStrategy based on its market cap’s premium over the market value of its Bitcoin.
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One of Bireme’s big positions is a short on shares of Michael Saylor’s MicroStrategy, the enterprise software player that’s strapped its fortunes to Bitcoin by packing $3 billion in the crypto leader on its balance sheet. Cognitive bias is a term from behavioral finance, the discipline positing that investors frequently make irrational decisions for reasons of comfort, habit or emotion. They specialize in finding situations where “cognitive biases” cause a stock to sell either well above or far below its fundamental value. 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.
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