Elon Musk’s out, so what comes next for Twitter?
The core issue, according to Musk and Co., is that Twitter’s claim that only 5% of its active users are fake or spam accounts cannot be definitively proven, and without such evidence, Musk’s team is concerned that the material value of the app is far lower, because you can’t derive expanded value from bots.
If Musk were to, say, make eCommerce a bigger focus in the app, the potential of such a shift is relative to how many real users, spending real money, you can actually reach. In this sense, Musk is right to question Twitter’s data – but the problem is that there’s no perfect way to measure fake accounts, so while Twitter is standing by its figures, there’s not really a means for Musk to counter such, other than via anecdotal examples.
Evidently, that hasn’t helped to clarify the situation, so now Musk is looking to walk away from the deal entirely, which could see things go one of three directions.
- Musk walks away from the deal, and pays Twitter a $1 billion break fee. Within the original terms of the deal, Musk agreed to a $1 billion charge if he opted out of the deal at any stage. That’s the minimum that it would cost Musk to exit the proposal – though many have also noted that it could be difficult for Musk to abandon the deal entirely, because he waived several due diligence measures within his original proposal, in order to hasten the Twitter deal. That could see Musk held to his original $44b offer regardless of any change of heart that he might have, while there are also some legal scenarios in which Musk would be forced to pay billions in costs to Twitter if he were to end the arrangement – though the specific amount of such would have to be determined by a court. Either way, Musk pays up, then leaves Twitter behind.
- Musk is forced to buy Twitter due to waivers in the original contract. As noted, some market watchers maintain that Musk will be forced to buy Twitter either way, due to the aforementioned waivers in the deal, though Musk’s team maintains that they negotiated access and information rights within the original Merger Agreement so that they could review key data and information before financing and completing the transaction. The legalities of this aspect could become the key element of a legal push by Twitter’s board, which has vowed to hold Musk to his original offer.
- Musk agrees to buy Twitter at a lower price. Another possibility is that Musk still buys Twitter, but at a lower price point, with this latest push being a tactic to bring down the offered price. Musk’s original $44b offer values Twitter at $54.20 per share (Musk, if you haven’t heard, loves references to ‘420’), which is significantly higher than the current $37 per share that TWTR stock is trading at. Maybe, by threatening to abandon the deal, that could prompt a renegotiation, which may still see Musk become the Tweeter in chief.
These are the three potential outcomes right now, all of which will cost Musk money – and none of which is particularly good for Twitter, which has already begun readying for the Musk era, by switching up growth strategies, slimming down its executive ranks and pumping out in-progress feature updates ahead of any shift.
Those decisions have also formed part of Musk’s pushback, with Musk and Co. noting that Twitter has made significant operational changes since the deal was offered, which alters the make-up of the company, and what Musk is paying for.
Twitter would argue that these changes are within normal business operations, but Musk’s team has flagged these as another element that it could use to extricate Musk from the deal.
And while abandoning the deal will ultimately cost Musk, from a financial perspective, this element has also been questioned, with a more technical market theory also floating around that Musk never intended to buy Twitter at all, and that he was simply using his Twitter bid as a means to sell off his Tesla options that were set to expire.
Musk sold $8.5b of Tesla stock to fund his Twitter takeover bid, which he would have had trouble doing without a plausible reason for such a sell-off. Now, Musk could exit the Twitter bid, pay the break fee, and pocket $7.5b. That seems like a big gamble, and a very public one at that, but if anyone had the audacity to pull it off…
So what comes next?
We either see a renegotiation, a legal battle of unknown outcome, or Twitter accepts the $1b break fee and moves on.
The latter could be very difficult, with the value of the company now significantly impacted by the Musk push, and the subsequent questions raised by him abandoning the deal. But it may also be the safest route for Twitter to take – unless it can swallow shaving billions off the original sell-off amount.
Because Musk’s team may well have solid legal footing, and Elon can afford the protracted legal battle that may result, especially given his Tesla options sell-off.
I mean, the prospect of a protracted legal battle doesn’t seem to be very daunting to Elon right now.
Can Twitter prove, definitively, that bots and spam make up only 5% of its active accounts? Does it have to?
It could take many months to establish the answers here, which will make things increasingly uneasy at Twitter HQ.
Elon Musk Sells of Tesla Stock in Preparation for Possible Twitter Deal
It seems that Elon Musk isn’t entirely confident that he’ll be able to pull out of his $44 billion Twitter takeover deal, with Musk reportedly selling almost $7 billion in Tesla stock in recent days in preparation for a transaction, if he is ordered to pay up.
As reported by The Wall Street Journal:
“Mr. Musk, Tesla’s chief executive and largest shareholder, sold around 7.9 million shares between Friday and Tuesday, the disclosures show, leaving him with a 15% stake in the company. The Tesla boss has been on a selling spree over the past year, during which he has cashed out roughly $32 billion worth of shares in the electric-vehicle maker.”
Musk has since confirmed the sell-off, explaining that:
In the (hopefully unlikely) event that Twitter forces this deal to close *and* some equity partners don’t come through, it is important to avoid an emergency sale of Tesla stock.
— Elon Musk (@elonmusk) August 10, 2022
The Musk/Twitter takeover is scheduled to be heard in the Delaware Court of Chancery in October, after Musk and his team sought to exit the deal based on Twitter’s inability to convince them that only 5% of its active users are fake/bot accounts.
In response, Twitter has outlined its ‘airtight’ case against Musk’s various claims, with the court scheduling an expedited trial based on Twitter’s counter evidence. Twitter’s counter filing has also suggested that this element is not a legal impediment to the closing of the deal, under its original terms.
That means that Musk’s takeover will come down to Musk’s legal team’s ability to convince the court that Twitter’s process of counting bots and fake accounts constitutes a material altering of the original terms of the proposal, which looks like it could be a difficult path to take.
Which is why Musk is now taking measures to prepare for a likely loss, which will eventually, probably, still see Musk become Tweeter in chief. Whether he wants to be or not.
Of course, you could also argue that this is due diligence, and that Musk is simply taking steps to ensure he’s covered, just in case he loses the case. Some have also suggested that Musk’s entire Twitter takeover bid has been an elaborate front in order to facilitate the sell off of Tesla stock options that were set to expire soon. These latest sell-offs could also play into that narrative, in enabling Musk to make even more money, without raising market concerns as he reduces his Tesla stake.
That’s super rich guy math, and I won’t even pretend to understand the complexities of how that might work – but it does seem like, at the least, Musk is slightly concerned that he’s not going to win his upcoming trial, and that he will indeed be forced to buy Twitter at his original agreed price.
Though Elon has also noted that he has a back-up plan, in case his Twitter deal falls through.
There’s nothing at X.com yet, but another Twitter user also shared this video clip in which Musk explained his plans for the website.
So Musk has a ‘pretty grand vision’ for what ‘X.com’, and ‘X Corporation’, could be, with Twitter helping to expedite that plan, whatever it is.
So even if Elon does lose his upcoming court case, he could still look to make bigger waves in the social media world – while it may also suggest that Twitter could become ‘X’ or something like it, in Elon’s broader plan.
Which kind of kills off this idea:
In any event, we’re now getting closer to a resolution one way or another, with the trial date looming, and Musk preparing for the next stage, whatever that may be.
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