It was always coming to this, and now it’s here: Elon Musk is seeking to back out on his deal to buy Twitter, and the case is headed to court. Today let’s talk about how we got here, what’s likely to happen next, and what employees are saying.
On April 25, after acquiring a bunch of Twitter stock, joining the board, and quitting the board, Elon Musk announced he was acquiring the company. He offered $54.20 a share, a price that some analysts derided as low, but the company’s famously weak board accepted the deal almost immediately. No other buyers had come forward with an offer, the board noted, and company leadership had no clear plan to get the company’s stock to the price Musk was willing to pay.
Within just a few weeks, the conventional wisdom — that Musk had underpaid, and that the board had been feckless — was stood on its head. Tech stocks crashed, and suddenly Musk’s $44 billion offer looked like a massive overpayment. He intended to borrow massively against his Tesla stock to complete the deal, but Tesla stock fell precipitously along with the rest of the market.
And so Musk had a dilemma. He had signed a legally binding agreement to buy the company, but the purchase now looked worse with every passing day. Forget buyer’s remorse — this was buyer’s mortification. I’ve sometimes compared Twitter to the Bluth Company from Arrested Development, and Musk had awoken up as its GOB, quietly repeating to himself: I’ve made a huge mistake.
And so he resolved to get out of the deal. He would not invest a lot of energy in coming up with a plausible pretext. The same reason he gave for wanting to buy Twitter — that, in his estimation, it was full of bots and spam — could suddenly be repurposed into his reason for not wanting to buy Twitter.
But Elon Musk is not the first person to regret buying a company before the deal could close, and merger agreements are designed to be difficult to weasel out of. And it turned out that the deal he signed made no provision for him to abandon it because there are bots on Twitter.
So his lawyers developed a new strategy: they would ask Twitter for endless information about bots and spam, and use any hesitation on Twitter’s part as a pretext to argue that the company hadn’t met its obligations and thus void the deal. Matt Levine explained the scheme on June 6:
There is a technical bit of mergers-and-acquisitions lawyering here that might be worth explaining. In the merger agreement, Twitter makes representations, statements about its business that it promises are true. Arguably one of them is something to the effect of “not much more than 5% of our monetizable daily active users are spam bots.” Musk thinks, or says he thinks, that this representation is not true. But even if he’s right, he can’t get out of the deal, unless it is untrue and would have a “material adverse effect” on Twitter’s business. If in fact 90% of Twitter’s users are bots, it knows that, and it has been lying to advertisers for years, then, uh, sure, maybe. But in any plausible case, there will not be an MAE, so he still has to close the deal and pay $54.20 per share. Merger agreements are written this way so that buyers can’t change their minds and come up with some trivial pretext — some tiny error in the representations — to get out of the deal.
But in the merger agreement, there are also covenants, promises that Musk and Twitter make to each other about what they will do going forward, between the signing of the merger agreement and the closing. If Twitter breaches a representation, Musk still has to close unless the breach causes a material adverse effect. But if Twitter breaches a covenant, Musk can walk away: He doesn’t have to close unless Twitter “shall have performed or complied, in all material respects, with its obligations required under this Agreement.” There is no MAE requirement: You just have to comply with the covenants.
The scheme went according to plan. Musk asked for an ever-increasing amount of data from Twitter, according to the regulatory filing his legal team made today seeking to terminate the merger agreement. Some requests were honored, some weren’t. Sometimes, Twitter gave him the data he wanted, but not in exactly the way he asked for it, or more slowly than he would have liked. Sometimes he asked Twitter for data that it reports publicly each quarter to the Securities and Exchange Commission.
Mind you, none of this bot data is material to Twitter’s business. Musk hasn’t offered a shred of evidence that Twitter has under-counted its bots, or made even a minimal case that the state of bots on the platform is correlated to the value of the company.
The point of this filing is not really to make that case — the point is to bury Twitter in paperwork, exasperating the company at every turn with ever more absurd requests, confident in the knowledge that no other buyer is on the horizon to rescue it. Any corporate value that gets destroyed along the way merely helps Musk in his bid to acquire the company at the steepest possible discount.
And make no mistake: Musk’s game of chicken with the Twitter board is destroying billions of dollars in value. Twitter stock, which traded around $73 last summer, was down to $36 today, and some analysts expect it could fall to $25 next week. More importantly, the chaos is driving many longtime Twitter employees to leave.
“It's so sad to see so many talented people quit. And there's many more to come,” one longtime employee who quit recently told me on Friday. “Everyone's circumstances are different, and interviewing takes time. But a lot of the people I know were at least passively looking.”
The employee put much of the blame on top Twitter executives, including CEO Parag Agrawal, who stand to receive huge paydays if the deal goes through.