Naturally, there was the “peril” report in the Washington Post, but there were also all those tweets. Countless tweets. He tweets so frequently; why? In any case, Musk didn’t break the deal in a tweet, but rather in a late-Friday Securities and Exchange Commission filing. The filing reiterates Musk’s very public complaints that Twitter hasn’t given his team the information they need to assess whether the company accurately calculated the number of fake users.
We understand the M&A arbitrageurs’ cautiousness.
We discovered a few other intriguing tidbits in the aforementioned filing in addition to Musk’s earlier complaints (about all the bots). Our emphasis is on Twitter’s claim that it stops counting spam or fake users in its mDAU when it realizes that they are fake seems to be untrue. Instead, we believe Twitter includes accounts that have been suspended—and are therefore known to be fake or spam—in its quarterly mDAU count even when it is aware that the suspended accounts were included in mDAU for that quarter, based on Twitter’s representations during a call with us on June 30, 2022.
First, are we certain that all accounts that have been suspended are fake? While none of your FT Alphaville Twitter-verified correspondents have ever had their accounts suspended, they may know some people whose accounts have been temporarily shut down after getting a little too heated. However, we assume that Twitter’s PR team was already very busy late on Friday night and it is possible that Twitter uses a different term for this penalty-box type of suspension.
Second, Musk’s team laments that they requested a spreadsheet of Goldman Sachs’ valuation model but were given a PDF instead, as Matt Levine noted on Twitter:
A number of board materials were requested by Mr. Musk on June 17, including a working, bottoms-up financial model for 2022, a budget for 2022, an updated draft plan or budget, and a working copy of the valuation model used by Goldman Sachs to support its fairness opinion. Only a pdf version of Goldman Sachs’ final Board presentation has been made available by Twitter.
Finally, Musk’s team objects to Twitter’s cost-cutting measures following the takeover news:
The actions taken by Twitter in terminating two important, high-ranking employees, the General Manager of Consumer and the Revenue Product Lead, as well as informing its audience on July 7 that a third of its talent acquisition team would be laid off, violate the ordinary course provision. Additionally, Twitter has implemented a general hiring freeze that even covers the review of pending job offers. The Head of Data Science, the Vice President of Twitter Service, and a Vice President of Product Management for Health, Conversation, and Growth have all left Twitter since the Merger Agreement was signed. The Company does not have Parent’s approval for any changes to the way it conducts business, including the particular changes mentioned above.
By no means is FT Alphaville the first to speculate that this might be an effort to persuade Twitter to accept a lower purchase price. After all, the Nasdaq Composite has fallen 26% so far this year. Twitter’s shares have only dropped 15% in comparison, but Musk’s offer now represents a 47% premium to the company’s current enterprise value of close to $30 billion.
Twitter might not want to engage in a drawn-out legal battle with a man who has faced the SEC head-on and emerged relatively unscathed.
However, it may attempt to coerce Musk into making the purchase. If we believe the company chairman’s late-Friday tweet, litigation may be in the works.
The relatively small breakup fee is important right now because it forces Twitter to press Musk to close the deal rather than just demand a one-time payment. According to Sujeet Indap and James Fontanella-Khan of the Financial Times, the maximum amount of damages is $1 billion.
Some readers may recall that Tyson Foods was not permitted to back out of its 2001 agreement to purchase IBP due to buyer’s remorse. Additionally, our colleagues point out that the Delaware Chancery Court only recently required follow-through last year.
It might also be helpful to read this thread from Texas appellate lawyer Raffi Melkonian.
On my timeline, there is a lot of misunderstanding regarding Elon’s ability to back out of the $1 billion Twitter deal. No. If he could leave, he would write that check right now.
Of course, the “plans to pursue legal action” mentioned by the chairman of Twitter could take many different forms. It might result in a straightforward deal renegotiation or go all the way to arguments in the Delaware Chancery Court. A renegotiated agreement could also face challenges; shareholders might not be pleased if Twitter’s board accepts a lower price for the company, though it is unclear whether any such challenge would be successful.
The biggest surprise would be if the Twitter fight results in anything less than a media circus, given all the players in the deal and its financing. Real corporate law enthusiasts will undoubtedly miss Leo Strine on the bench if the case goes to trial.