Ever since Elon Musk made an offer to buyout Twitter (TWTR) back in April, the story has transcended the deal pages and become a tabloid phenomenon.
Basically, Elon Musk offered to buy Twitter at a price of $54.20 per share, or $44 billion.
A few weeks passed and Musk complained that Twitter’s user numbers were juiced by bots, claiming that the number of bots is far closer to 20% of users than the claimed 5%. He eventually attempted to back out of the deal on this front.
Twitter sued Musk in Delaware court for backing out of the deal and the trial begins in October.
Elon Musk vs. Twitter Timeline
This saga has been ongoing for a number of months now. Here’s an official timeline.
- April 4: Musk announces a 9.2% stake in Twitter
- April 5: Musk becomes a member of the Twitter Board of Directors
- April 11: Musk declines joining the Twitter Board of Directors
- April 14: Musk files a buyout offer with the SEC to purchase the company for $54.20/share, or $44 billion.
- April 15: Twitter enacts a poison pill to stop Musk from taking over the company
- April 25: Twitter accepts Musk’s buyout offer
- May 14: Musk announces that his offer to Twitter is on hold due to spam and bot concerns.
- May 16: Musk says a new deal with Twitter is “not out of the question” at a lower price.
- May 17: Musk says he can’t move forward with the deal due to spam and bot concerns
- May 27: The SEC investigates Musk’s disclosure activities around his initial purchases of Twitter stock
- June 6: Musk says he has the right to terminate the merger agreement
- June 8: Twitter gives Musk access to internal tweet data to assess spam/bot concerns
- July 8: Musk officially announces his intention to terminate the merger agreement in an SEC filing
- July 12: Twitter sues Musk in Delaware court to force him to complete the merger agreement
Why Does Elon Musk Want to Buy Twitter?
In a nutshell, Musk decided he wanted to buy Twitter. But why?
His free speech and political neutrality concerns get the most attention. Musk takes issue with a series of what he deems to be politically driven decisions about account suspensions and censorship, chief among them the suspension of former President Donald Trump.
However, these concerns paint Musk as an altruistic billionaire who wants to fix Twitter for reasons of passion over profit. This is probably somewhat true but doesn’t paint the whole picture.
The reality is that Elon Musk is one of the most important users on Twitter. Beyond being one of the top 10 accounts in terms of followers, he is almost certainly #1 on the platform in terms of engagement.
It’s hard to understate the power of his tweets. Musk sending a 100 character tweet while waiting for transportation can create billion-dollar tremors in financial markets. Take his tweets about Dogecoin, GameStop, Bitcoin, and Etsy, just to take a few examples.
His tweets yield a lot of power and play a role in his reputation as an eccentric science fiction billionaire. Owning that digital real estate could be worth far more to Musk than the purchase price of Twitter.
Bloomberg’s Matt Levine agrees:
Twitter doesn’t make that much money compared to Facebook and other social-media companies. It’s not that big a company in terms of market cap. He might say, “Look, I get so much value out of this direct access to the public.” Owning that direct access to the public—owning that thing that creates so much value for Elon Musk and Tesla—it has to be valuable somehow, whether it’s by increasing the value that it creates for Tesla, or whether it’s by finding a way to monetize the value that it creates for sports stars and celebrities and Donald Trump and lots of other people. You know, Donald Trump’s tweets back when he was on Twitter could create billions or trillions of dollars’ worth of market moves, right? And Twitter never made a lot of money off of that.
Why is Elon Musk Backing Out of the Deal?
Musk’s stated concerns with regard to closing the Twitter deal are Twitter bots and spam making the user and engagement numbers look larger than the reality.
According to Musk’s legal team, Twitter breached the merger agreement by not disclosing certain data related to spam/bot accounts on Twitter. Specifically, they said that “For nearly two months, Mr. Musk has sought the data and information necessary to ‘make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform… Twitter has failed or refused to provide this information”
One question many are asking is why Musk decided to do his due diligence on Twitter bots after signing a merger agreement with them. Furthermore, if bots were a significant concern, why was there no language in the merger agreement about bots?
In Musk’s defense, Twitter’s bot-detection process seems almost intentionally lenient, if his legal team is to be believed:
“In a May 6 meeting with Twitter executives, Musk was flabbergasted to learn just how meager Twitter’s process was. Human reviewers randomly sampled 100 accounts per day (less than 0.00005% of daily users) and applied unidentified standards to somehow conclude every quarter for nearly three years that fewer than 5% of Twitter users were false or spam. That’s it. No automation, no AI, no machine learning.”
Of course, most of the time when a buyer tries to get out of a merger deal, their claims are more attempts to get out of the deal than supposed “new” findings. This is pretty much assumed among M&A traders.
Many are making the assumption that due to the downturn in equity markets since the deal was signed, Musk wants a discount.
Can Elon Musk Legally Back Out of the Deal?
While Musk claims that Twitter breached their merger agreement by not disclosing certain information about the number of bots on their platform, the merger agreement actually doesn’t explicitly mention anything about bots.
This fact is being muddied in the tabloid drama that this case has become. But ultimately, the judge won’t be reading Vox or the National Enquirer, she will be looking at the language of the merger agreement, in which there are no relevant guarantees or promises about bots.
Specifically, the fact being confused is that Twitter promised that the number of bots on the platform is less than 5%. This is half-true.
It is true that Twitter disclosed in an SEC filing, that, in their estimation, less than 5% of their daily active users are bots. Most relevant here is that Twitter made such an estimation in an SEC filing, not in the merger agreement. The merger agreement is the relevant document here, not Twitter’s SEC filings.
Furthermore, the specific language in Twitter’s assessment of bot activity on the platform makes no promises and in fact tiptoes around that:
“In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated.” – Source
If Musk and his legal team aren’t successful in making their case to the judge, Musk faces the potential of facing a $1 billion breakup fee, or even being forced to close the deal at the original price of $54.20 per share.
Overview of the Musk vs. Twitter Case
This case hasn’t even gone to trial yet, so we don’t yet know about the claims of each legal team. However, based on initial filings, we have an idea of the main arguments each legal team is making.
Keep in mind, I’m not a lawyer and far from a legal expert. The most analysis I do is reading M&A documents so don’t rely on this.
Twitter’s Case
Twitter basically has two goals here:
- Get Musk to close the deal
- Go to trial as soon as possible
Primarily, they state there is no language related to bots and spam in the merger agreement they signed with Musk. For that reason, using a claim about inaccurate bot numbers is irrelevant to the terms of the deal and Musk should be forced to close the deal.
They want to go to trial as soon as possible, one stated and one not stated.
Twitter’s legal team says that everyday the deal doesn’t close inflicts damage to the company’s brand and operations. Not knowing who will own the company, be the CEO, which employees are staying, and so on is sure to cause disorder at the company.
The unstated reason for Twitter rushing to trial is that Musk’s financing expires in April 2023. The longer Musk can push back the trial, the closer he gets to losing his financing which makes a concrete case for not closing the deal.
Musk’s Case
Musk’s backout of the deal almost entirely hinges on skepticism regarding Twitter’s users, specifically the metric mDAU (monetizable daily active users).
Musk and his legal team claim that the mDAU metric is being juiced by the fact that Twitter is understating the number of bots and spam on their platform by using an inaccurate process to estimate how many bots are on the platform.
They claim:
- Twitter is avoiding giving Musk and his team more accurate user numbers and they’re being stonewalled on these efforts
- Twitter restated their mDAU numbers after meeting with Musk, implying that they were previously inaccurate
- It’s not in Musk’s interests to stall the deal because he owns a large portion of the company already
Delaware Court Update
A judge was assigned to the case, Kathaleen McCormick, who is notable for the fact that she made the rare decision to force a reluctant buyer in a similar case to close a merger deal.
McCormick forced the private equity firm Kohlberg & Co purchase the cake decoration company DecoPac Holdings Inc. for $550 million, after Kohlberg tried to prove that the coronavirus pandemic constituted a material adverse effect in their sales numbers.
McCormick ruled in Twitter’s favor on Tuesday in granting Twitter’s request for an expedited trial. As of now, the trial is set to begin in October. This pretty much kills Musk’s plan to keep the deal in limbo until his financing expires in April 2023.
Bottom Line
Many legal experts are weighing in on this case and most see the case going in Twitter’s direction, especially now that Twitter got their request for an expedited trial granted.
Between the reputation of the Delaware Court of Chancery and Chancellor Kathaleen McCormick, Musk’s shakey legal grounds, and the expedited trial, things are looking poor for Elon Musk.