Elon Musk’s Twitter deal has turned into a multi-billion dollar chicken game

OIn the past two months, Elon Musk’s proposed $44 billion takeover of Twitter has had a number of labels put on it. The takeover has been variously labeled as a saga, drama, clash, struggle and “breakaway capitalism”. When a story involves someone as colorful as Musk, and when the narrative is constantly changing, it’s easy to find increasingly colorful terms to describe what’s happening.

And why stop now? Certainly not Musk. The plot changed again on Monday when Musk stated in no uncertain terms what he had been saying implicitly for the past few weeks: he will call off the deal and walk away unless Twitter lets him see the data used to calculate his estimate Bots and spam accounts may result in inflated estimates of traffic to the site. Twitter says it can’t, and it won’t.

At this point, the Musk-Twitter deal is labeled a saga or drama, which kind of undercuts what’s going on. In fact, it now resembles a billion-dollar chicken game: Musk behind the proverbial wheel of one car, the Twitter board in another, the two vehicles speeding towards each other.

The game’s momentum begins with Musk’s claim that there are far more bots on Twitter than the company acknowledges. Twitter and its CEO, Parag Agrawal, go on to claim that these spammers account for less than 5% of daily active accounts. Musk has suggested the percentage is much higher, possibly five times that.

Musk said Monday Twitter’s failure to provide him with data about the bots constituted a “material breach” of the merger agreement, a breach large enough to end the deal. Previously, he argued a slightly different point and proposed discrepancy between his number and Twitter’s could be enough to call off the deal, possibly because a discrepancy between his number and Twitter’s could constitute fraud on the part of Twitter – or, if it’s not overt fraud, then discovery of the inconsistency under the category of a so-called “material adverse change,” a sudden event that would materially and adversely alter the course of Twitter’s business. If advertisers found out that the place is actually a ghost town full of fake profiles – fake people – they would probably be less inclined to pay for ads there. Very bad for a company that relies on advertising revenue. Very materially disadvantageous, you could say.

But could you say Musk has a shot at proving both cases in court? This is where lawyers and lawyers clear their throats. Probably not, they say in general. And the latest bit about Twitter not sharing its bot data with it is particularly thin, these experts say. “There is no specific clause in the merger agreement that requires Twitter to do what Musk is asking, and therefore Twitter is not violating the agreement if they refuse,” said George Geis, a professor of corporate law at the University of Virginia. “Most merger agreements require the seller to assist the buyer with due diligence. But Musk waived it.” Yes, he certainly waived his right to due diligence in April when he first struck a deal with Twitter’s board of directors.

But what if Musk isn’t looking for a safe legal case? What if he just wants: “Lever”, says Geis. “I get the impression that sometime maybe a week or two ago he asked his attorneys to take a closer look and said, ‘Give me real leverage on the transaction.'”

So it doesn’t matter if Musk is right about the bots or Twitter. Musk doesn’t have to be right and win a lawsuit. All he needs to do is find something to start a case and engage Twitter in time-consuming legal battles. And he’s probably found enough to do so already, the same experts say. Musk can afford to wait and afford the million-dollar fees his lawyers will pile up in Skadden, Arps; publicly traded Twitter doesn’t have the same luxury of unlimited time. Twitter’s board of directors may have once viewed the sale of the company to Musk for $54.20 per share as a reasonable discharge of its fiduciary duty to investorsespecially since the stock market has plummeted since the deal was approved. But does it fulfill the same duty of forcing the company into a dangerous state of years of limbo — while the courts sift through Musk’s case? Even if the board agrees, the shareholders cannot. The deal has yet to go to investors for a vote, which will happen later this year.

Predicting how this chicken game will end – a contest that has already proven so unpredictable – seems to raise the possibility of getting a face full of eggs. To allow for a long discussion, here’s an educated guess as to the outcome: If markets continue to be depressed, the Twitter car will hit the proverbial brakes first and the board will renegotiate. The company simply has more to lose than Musk in the lengthy process of bringing a Delaware judge into the process.

Two other points that support this conclusion. A few weeks ago, Musk rebalanced the funding he needs for his offering, removing a risky margin loan from the package of over $45 billion in equity and debt. As a rule, you do not tinker with changing financing conditions that you do not intend to need. Then there’s the simple, proven fact that most fine-print M&A disputes almost always end with the two parties negotiating and consummating the transaction. Ask any attorney (or several) and they can generally only come up with an example or two that runs the length of the legal system. Coincidentally, in the most recent example from 2018, a court allowed German healthcare company Fresenius to back down from its purchase of Akorn, a generic drug maker, even though the magnitude of Akorn’s problems appears to be drastically greater than even the most hyped-up figure via bots on Twitter.

But Fresenius-Akorn is the exception. Most of the time, things generally end up the way LVMH did when it bought Tiffany & Co. The two luxury companies sued each other in 2020 after LVMH tried to scupper a deal to buy Tiffany, citing the pandemic’s impact on the jeweller’s business. In the end, they settled out of court after Tiffany agreed to a slightly reduced price of less than 3%.

“If you want a discount on something, don’t say, ‘I want a discount,'” says Andrew Verstein, co-director of UCLA’s Lowell Milken Institute for Business Law and Policy. “You just need an excuse for a salesman to go up to his constituents and say, ‘Look, this guy negotiated hard and he pointed out some issues and we were ready to strike a new deal.'”

Leave a Reply

Your email address will not be published.