Elon Musk’s out, so what comes next for Twitter?

That’s the question that everyone’s asking following Musk’s letter to the SEC late Friday, in which Musk’s team advised that they’re moving to terminate his $44 billion takeover offer for the app.

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.

Which Musk has tried, while Twitter has also given Musk all of the internal data access that it can, to enable Musk’s team to make their own assessment.

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.

1. 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.
2. 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.
3. 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.