Since Elon Musk offered to buy Twitter ( TWTR ) in April, the story has surpassed the deal pages and become a tabloid phenomenon.
Originally, Elon Musk offered to buy Twitter for $54.20 per share, or $44 billion.
A few weeks passed and Musk complained that Twitter’s user numbers were being juiced by bots, claiming that bots accounted for closer to 20% of users than the claimed 5%. Ultimately he tried to back out of the deal on this front.
Twitter sued Musk in a Delaware court for pulling out of the deal, and a trial is set to begin in October.
Elon Musk Vs. Twitter timeline
This saga has been going on for the past several months. Here is an official timeline.
- April 4: Musk disclosed a 9.2% stake in Twitter
- 5 April: Musk became a member of the Twitter board of directors
- April 11: Musk refuses to join Twitter board of directors
- April 14: Musk files a buyout offer with the SEC to buy the company for $54.20/share, or $44 billion.
- April 15: Twitter creates a poison pill to stop Musk from taking over the company
- April 25: Twitter accepts Musk’s buyout offer
- 14 May: Musk announces that his offer on 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 because of spam and bot concerns
- May 27: The SEC is investigating Musk’s advertising activities surrounding his initial purchase 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 announced his intention to terminate the merger agreement in an SEC filing
- July 12: Twitter sues in Delaware court to force Musk to complete merger agreement
Why does Elon Musk want to buy Twitter?
In short, Musk decided he wanted to buy Twitter. But why?
His concerns for free speech and political neutrality garner the most attention. Musk has taken issue with a series of what he sees as politically driven decisions about account suspensions and censorship, chief among them the suspension of former President Donald Trump.
However, these concerns paint Musk as a benevolent billionaire who wants to fix Twitter for reasons of passion rather than profit. This is probably true to some extent but does not paint the whole picture.
The reality is that Elon Musk is one of the most important users of Twitter. In addition to being one of the top 10 accounts in terms of followers, it is almost certainly #1 on the platform in terms of engagement.
It’s hard to understate the power of his tweets. Musk could send a 100-character tweet while waiting for a ride, causing a billion-dollar rumble in the financial markets. Take his tweets about Dogecoin, GameStop, BitcoinAnd EtsyTo take just a few examples.
His tweets ooze power and play into his reputation as an eccentric science fiction billionaire. Owning that digital real estate could be worth more to Musk than Twitter’s purchase price.
Bloomberg’s Matt Levine agrees:
Twitter doesn’t make that much money compared to Facebook and other social media companies. It is not a big company in terms of market cap. He might say, “Look, I get a lot of value from this direct access to the public.” Owning something that creates so much value for Elon Musk and Tesla—owning direct access to people—must be valued in some way, whether that’s by increasing the value created for Tesla, or finding a way to monetize it. The value it creates for sports stars and celebrities and Donald Trump and many others. You know, when Donald Trump was on Twitter his tweets could create billions or trillions of dollars in market moves, right? And Twitter never made much of it.
Musk’s concerns regarding closing the Twitter deal are Twitter bots and spam that make user and engagement numbers appear larger than they actually are.
According to Musk’s legal team, Twitter breached the merger agreement by not disclosing certain data related to spam/bot accounts on Twitter. In particular, they said that “For nearly two months, Mr. Musk has sought ‘the data and information needed to independently assess 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 then Signed 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 deliberately liberal, if its The legal team believes:
“In a May 6 meeting with Twitter executives, Musk was surprised to learn how flimsy Twitter’s process was. Human reviewers randomly sampled 100 accounts per day (less than 0.00005% of daily users) and applied unknown standards to conclude that less than 5% of Twitter users were fake or spam every quarter for about three years. 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 “new” findings. This is highly regarded among M&A traders.
Many are speculating that Musk is seeking a discount because of the downturn in the equity market since the deal was struck.
Can Elon Musk legally pull out of the deal?
While Musk claims that Twitter breached their merger agreement by not disclosing specific information about the number of bots on their platform, the merger agreement is not actually clear. Mention anything about bots.
This fact is being mudsled in the tabloid drama that the case has become. But ultimately, a judge won’t read Vox or the National Enquirer, he’ll see the language of the merger agreement, which contains no relevant guarantees or promises about bots.
In particular, the fact that Twitter promised that the number of bots on the platform is less than 5% is confusing. This is half true.
It’s true that Twitter disclosed in an SEC filing that, according to their estimate, bots account for less than 5% of their daily active users. Most relevant here is that Twitter made such an estimate in an SEC filing, not in the merger agreement. The merger agreement is the relevant document here, not Twitter’s SEC filing.
Additionally, specific language in Twitter’s assessment of bot activity on the platform makes no promises and in fact hints around:
“In making this determination, we have exercised considerable judgment, so our estimate of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts may be greater than our estimate.” – source
If Musk and his legal team do not succeed in making their case to a judge, Musk faces a $1 billion breakup fee or could be forced to close the deal at the original price of $54.20 per share.
Musk Vs. Overview of the Twitter case
The case hasn’t even gone to trial yet, so we don’t yet know every legal team’s claims. However, based on initial filings, we have an idea of the key arguments being made by each legal team.
Keep in mind, I am not a lawyer and far from a legal expert. Most of the analysis I do is reading M&A documents so don’t rely on this.
The case of Twitter
Twitter basically has two goals here:
- Get Musk to close the deal
- Go to the trial as soon as possible
Mainly, they state that the merger agreement they signed with Musk contained no language regarding bots and spam. For that reason, the use of claims about inaccurate bot numbers is irrelevant to the terms of the deal and should force Musk 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 the daily deal does not harm the company’s brand and operations. Not knowing who will own the company, who will be the CEO, which employees will stay, etc. is sure to create chaos in the company.
The unspoken reason for the rush to the Twitter 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 solid case for not closing the deal.
The case of Musk
Musk’s deal is based almost entirely on skepticism regarding Twitter’s users, particularly the metric mDAU (monetizable daily active users).
Musk and his legal team claim that the mDAU metric is being skewed by the fact that Twitter is underestimating 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 has been reluctant to provide more accurate user numbers to Musk and his team, and they are stonewalling these efforts.
- Twitter gave their mDAU numbers again then An interview with Musk, however, suggests he was previously unsure
- Blocking the deal is not in Musk’s interest as he already owns a large stake in the company.
Delaware Court Update
A judge was assigned to the case, Kathleen McCormick, who is notable for the fact that she made the rare decision to force a reluctant buyer to close a merger deal in a similar case.
After Kohlberg tried to prove that the coronavirus pandemic was adversely affecting their sales numbers, McCormick pushed private equity firm Kohlberg & Co. to buy cake decoration company Decopack Holdings Inc. for $550 million.
McCormick ruled in favor of Twitter on Tuesday, granting Twitter’s request for a speedy trial. The trial is currently scheduled to begin in October. This in many ways kills Musk’s plan to keep the deal in limbo until its financing expires in April 2023.
Bottom line
Many legal experts are weighing in on the case and most believe the case is headed in Twitter’s direction, especially now that Twitter has received their request for a speedy trial.
Between the reputation of the Delaware Court of Chancery and Chancellor Kathleen McCormick, Musk’s murky legal grounds and speedy trial, things are looking bleak for Elon Musk.
