Elon Musk is the richest person in the world, and an active Twitter user. When he tweets, he gets a lot of spammy replies, many of which seem to be written by automated bots. He has complained about this a lot. Eventually he decided to do something about it. The thing that he decided to do about it was buy Twitter. On April 13, he sent a letter to Twitter Inc.’s board of directors offering to buy the company for $54.20 per share in cash. “If our twitter bid succeeds,” he tweeted, “we will defeat the spam bots or die trying!”
His Twitter bid succeeded. On April 25, Twitter and Musk issued a joint press release announcing that he had agreed to buy Twitter for $54.20 per share. The press release included a quote from Musk promising to “make Twitter better” by, among other things, “defeating the spam bots.” He was really mad at the spam bots! He wanted to buy Twitter because of the spam bots.
Yesterday he announced that he does not want to buy Twitter because of the spam bots:
Elon Musk declared he won’t proceed with his $44 billion takeover of Twitter Inc. unless the social media giant can prove bots make up fewer than 5% of its users, casting yet more uncertainty over the deal.
The billionaire tweeted “this deal cannot move forward” unless Twitter provides proof of its claims, reiterating his own view that the ratio is far higher. …
Twitter said it is “committed to completing the transaction on the agreed price and terms as promptly as practicable,” in a statement on Tuesday. …
The battle over bots has become a sticking point for Musk, who told a tech conference in Miami on Monday that fake users make up at least 20% of all Twitter accounts, possibly as high as 90%. Twitter regularly states in its quarterly results that the average of false or spam accounts “represented fewer than 5% of our monthly daily active users during the quarter,” adding that it applied “significant judgment” to its estimate, and the true number could be higher.
I think it is important to be clear here that Musk is lying. The spam bots are not why he is backing away from the deal, as you can tell from the fact that the spam bots are why he did the deal. He has produced no evidence at all that Twitter’s estimates are wrong, and certainly not that they are materially wrong or made in bad faith. (Musk can only get out of the deal if Twitter’s filings are wrong in a way that would cause a “material adverse effect” on Twitter, which is vanishingly unlikely.) His own supposed methodology for counting spam bots is laughable. Yesterday Twitter’s chief executive officer, Parag Agrawal, tweeted a thread explaining in general terms how Twitter estimates that fake accounts represent fewer than 5% of its count of active users, and how this analysis can’t be easily replicated by outsiders (because they don’t know which accounts are real, and also because they don’t know which accounts Twitter counts as daily active users). It seems clear that Agrawal’s thoughtful answer is basically correct. Musk responded with a poop emoji.
More important, nothing has changed about the bot problem since Musk signed the merger agreement. Twitter has published the same qualified estimate — that fewer than 5% of monetizable accounts are fake — for the last eight years. Musk knew those estimates, and declined to do any nonpublic due diligence before signing the merger agreement. He knew about the spam bot problem before signing the merger agreement, as we know because he talked about it constantly, including while announcing the merger agreement. If he didn’t want to buy Twitter because there are spam bots, he should not have signed a contract to buy Twitter. No new information has come to light about spam bots in the last three weeks.
What has happened in the last three weeks? Well, the prices of tech stocks have gone down, making the $54.20 price that Musk agreed to look a bit rich. (Snap Inc., a social-media competitor to Twitter, is down more than 30% since Musk made his offer on April 13.) And the price of Tesla Inc. stock, which he is relying on to finance part of the purchase price, has also gone down, making him poorer and making the $54.20 price look even more expensive. (Tesla is down almost 30% since he made his offer.) So he is angling to reprice the deal for straightforward market reasons. But that is very clearly not allowed by the merger agreement that he signed: Public-company merger agreements allocate broad market risk to the buyer, and he can’t get out just because stocks went down.
So he is pretending that he wants to reprice the deal for other reasons. He is not pretending very hard — the poop emoji is not going to hold up in court! — but he’s doing enough to confuse the public and give his fans a pretext to believe that he is really the victim here.
Poor Twitter. After Musk announced that he had taken a 9% stake in Twitter, but before he offered to buy the company, he signed a standstill agreement under which he would join Twitter board’s board of directors and promise not to buy more than 14.9% of the stock. Four days later he tore up that agreement; then he made his bid.
This is an awkward situation for Twitter’s board. They can’t really accept Musk’s offer. For one thing the price is embarrassingly low; again, Twitter traded above the offer price last October. For another thing, the financing seems to be made up of cobwebs and phlogiston. But also Musk has joked about taking companies private before, and he generally changes his mind a lot. (He agreed to join Twitter’s board last week! And then changed his mind four days later!) If you are a well-advised professional public company board, it is just catastrophic to imagine that you might say “okay Elon $54.20 it is” and then he’d say “ha no I was kidding, psych!” That would be crippling for a public company. Also that is basically what he did to Twitter’s board last weekend!
Well, here we are. Twitter accepted Musk’s offer, and three weeks later, he said “ha no I was kidding, psych!” And it is catastrophic.
What can Twitter do about it? Certainly they can walk Musk through their methodology and give him evidence that spam accounts represent fewer than 5% of monetizable daily active users, but what good will that do? He doesn’t care, he’s lying about this, and no evidence that they can give him will have any effect. Twitter could get all 229 million of its monetizable daily active users in a room and have them say “hello Elon, we are real,” and that would not convince him, because he does not want to be convinced. He wants to pay a lower price.
Or Twitter can do what he actually wants, which is renegotiate the deal at a lower price. But what good will that do? What does Twitter get from signing a new merger agreement with him at, say, $42 per share? He has not lived up to any of his agreements with Twitter — the standstill, the non-disparagement clause of the merger agreement, apparently a nondisclosure agreement, the merger agreement itself — and he’s not going to live up to a repriced merger agreement unless he feels like it. An agreement with Elon Musk is worthless, as Twitter has learned over and over again.
Or Twitter can try to hold him to the terms of his current deal, but that is also risky. The way the merger agreement works is that Musk’s damages are capped at a $1 billion reverse termination fee: If he walks away and Twitter sues for damages, it can’t get more than $1 billion, or about $1.30 per share, which is nowhere close to enough to compensate for losing this deal.
The agreement does, however, allow Twitter to sue for “specific performance,” meaning that it can go to a Delaware court and ask a judge to order Musk to close the deal (and fund his $27.5 billion equity commitment). But this is tough and there is no guarantee it will work. Specific performance is only possible if Musk’s debt financing is available, which seems likely but not certain, and if a judge is willing to order it. On the one hand, Musk’s lawlessness and bad faith will probably annoy a judge and make her more likely to specifically enforce the merger agreement. On the other hand, Musk’s lawlessness and bad faith might worry a Delaware judge and make her less likely to specifically enforce the merger agreement. It is bad, for the rule of law generally and for confidence in Delaware corporate law in particular, if Musk blatantly ignores a merger agreement and a judge lets him get away with it. But it’s even worse if a court orders him to close and he ignores the order. Musk has a history of ignoring court orders and getting away with it.
Or, the fairest consequence for all of this might be for Twitter to kick him off Twitter (they run Twitter! they can do that!), but I bet they won’t.
I don’t know what will happen here. Twitter has no good options. The market thinks that the most likely outcome is that the deal gets done at a lower price, rewarding Musk for his bad faith.
One weird point is that, while Musk has tweeted about not going ahead with the deal, and talked about it at a private conference for his fans, it doesn’t seem like he has sent any formal notice to Twitter saying that the deal is off. (Certainly neither Musk nor Twitter have made any SEC filings about that sort of notice, which you might expect if he’d sent one.) Perhaps his lawyers are less willing to ignore the agreement than he is, or at least need a better pretext than he’s managed so far.
So arguably Twitter’s best option is to do nothing: Let Musk tweet, ignore him, and continue acting as though everything is normal and the deal is going to close. Don’t give him any more pretexts to walk away, just keep trying to get regulatory and shareholder approvals, and then come to him ready to close and see how serious he is about all of this. The basic problem with Musk, for Twitter, is that he changes his mind a lot. Maybe he’ll change it again.