Elon Stubs His Doobie Deal

After Taking Twitter on a Bad Trip

In the film Casablanca, Inspector Renault famously says he is “shocked” to discover gambling in Rick’s American Cafe, ordering the cafe closed as he collects and pockets his personal winnings. And something similar seems to be playing out today with Twitter and Elon Musk, who says that he too is ‘shocked’ to discover that Twitter may have more bots and fake users on its platform than Twitter has publicly reported, an allegation which remains unconfirmed but which Musk has suspected and tweeted about for years. And on this rather thin pretext, Musk announced Friday that he is unilaterally terminating his agreed merger with Twitter, a transaction which I have previously referred to as Elon’s Doobie Deal. By terminating the merger agreement, Musk will if successful save himself and his co-investors perhaps $20 billion in avoided capital loss, which makes Inspector Renault’s gambling winnings pale in comparison.

Musk’s legal arguments, outlined in this SEC filing, allege that Twitter breached the merger agreement by not providing Musk on a timely basis with adequate information to enable him to verify the composition of Twitter’s publicly disclosed user base, although for precisely what purpose is not exactly clear. Musk also alleges that Twitter has breached the merger agreement by taking certain personnel decisions without his consent. And because of these breaches, his lawyers assert, Musk has the legal right to terminate the merger agreement unilaterally and without financial consequence.

It seems likely, however, that fake users, SEC disclosures and HR decisions really have very little to do with Musk’s actual motivation for pulling out of the deal. Since Musk signed the merger agreement with Twitter back on April 25th, the stock market has fallen, interest rates are up, credit spreads have widened, the market for high yield bonds and leveraged loans has dried up, and recession risks are rising. Advertising revenues are off and the market value of social media stocks has collapsed. As has the market price of the Tesla shares which Musk planned to use as collateral for much of his Twitter funding. It is quite possible that some of Musk’s financing sources have backed off of their funding commitments and/or have lobbied Musk to renegotiate the terms of the deal (ie price). And Twitter shares have pretty consistently traded at a hefty discount to the agreed deal price, indicating a healthy degree of investor skepticism as to Musk’s commitment to closing the deal on its original terms as well as to the underlying stand alone-value of Twitter.

These are all very good reasons for wanting to terminate the Twitter merger. The problem for Musk, of course, is that none of these facts provide him with a legal “out” under the terms of the merger agreement which he signed.

Musk agreed on April 25th to buy all of Twitter for cash, with no financing contingency, at a price of $44 billion, which is now $20 billion or so above Twitter’s current (and declining) market value as a stand-alone entity. At today’s price of $34, Twitter shares are now trading at a 40% discount to the deal price ($54.20), which is also below the level at which they traded before Musk surfaced as the surprise buyer of a 9% stake in the Company. This large gap between the agreed deal price and Twitter’s current market value may have rather more to do with Musk’s motivation for termination than does the number of bot accounts on Twitter. And if there has in fact been a material adverse change in Twitter’s business since the merger agreement was signed, as Musk’s attorneys allege, this is likely attributable more to Musk’s own divisive public criticism of Twitter’s management and his meddling in company affairs than to any business decisions taken by Twitter itself.

But did Musk ever really intend to buy Twitter, or was this just another of Elon’s fun pranks which got out of hand, albeit with rather higher stakes than his previous ones? Many people who buy into this narrative think that Elon Musk is an irresponsible flake, who too often behaves like a child, and that his controversial actions (and tweets) demonstrate flawed aspects of his personality so vividly captured on the SNL “Dogefather” skit. Why even Donald Trump calls Musk a “BS artist” and he should know. So maybe there is something to this “Elon will be Elon” narrative.

But I think we have to be a bit careful here. Many people also think Elon Musk is the greatest businessman of our time, the Thomas Edison of the 21st century. And Tesla investors have made a lot of money with Musk, despite his personal shenanigans and even with the Tesla stock price down 35% since Musk got bitten by the Twitter bug. As outsiders, we really have no idea what has actually transpired inside the tent at various stages of the Twitter transaction, although the truth may in fact turn out to be even more sordid than many now suspect. In any event, it seems to me highly unlikely that even Elon Musk on his worst day (after 4:20pm) would sign a $44 billion merger agreement if he wasn’t actually committed to closing, at least at the time he signed. And any smart business person would attempt to back out of the Twitter deal if they could, so we can’t really blame Musk for trying.

At a minimum, however, I think most of us would probably agree that Elon Musk has demonstrated in the Twitter deal, and on more than one occasion previously, an aggressive personal indifference to the laws and norms applicable to the rest of us and a blatant disregard for the US securities laws and the enforcement power of the SEC. I am thinking here of Musk’s infamous Tesla going private tweet, his flawed public disclosures regarding his initial purchases of Twitter shares, and possibly also Tesla’s questionable bitcoin transactions and related disclosures. All of which is troubling to say the least, especially when we are talking about the CEO of a large US public corporation and the sponsor of a $44 billion public company merger transaction.

I have no idea how the current battle between Musk and Twitter will play out, but it will certainly be fascinating to watch. If Musk is allowed to walk away from this deal, even with the payment of a $1 billion break-up fee or some amount of damages, it is likely that he will come out of the experience more or less unscathed financially and un-humbled personally. When Musk settled the SEC fraud charges relating to his Tesla going private tweet, he had to pay $20 million in fines (chump change for him) and he was forced to resign temporarily as chairman of the Tesla board, an irritant that will soon go away. Most normal people would have been at least somewhat chastened by this sort of experience, but not Elon Musk. As far as I can tell the Tesla going private affair only emboldened Musk to double down in his flaunting of the SEC, which may explain some of what we witnessed subsequently in the Twitter deal. Perhaps this time will be different, but I wouldn’t bet my Tesla on it.

However things play out in the courts, and in the boardroom, the big loser in this saga will almost certainly be Twitter, which has already been damaged substantially by its unsolicited and no doubt much regretted interactions with Elon Musk. Given its currently weakened state, and the increasingly hostile business, economic and regulatory environment in which it operates, Twitter may well decline into irrelevance if it is not able quickly to turn things around or find a more responsible buyer for the Company. The good news for Twitter, if there is any, is that pretty much anyone they can think of as a potential buyer would at this point likely be more responsible than Elon Musk. And so the Company may be better off without him.

But Twitter’s shareholders would sure like to recoup some of all of that $44 billion cash merger consideration out of Elon Musk’s rather deep pockets, and who can blame them?

Links:

Elon Musk Seeks to Abandon $44 Billion Twitter Deal, WSJ July 9, 2022

What Happened to the Twitter-Elon Musk Deal? WSJ July 9, 2022

Twitter, Musk Set for Unprecedented Legal Battle, WSJ July 9, 2022

Elon Musk is Twitter’s Material Adverse Event, WSJ July 9, 2022

Twitter Stock Drops After Musk Looks to Nix Deal, WSJ July 11, 2022

Twitter Didn’t Seek a Sale, Now Says Musk Must Buy It…Cue Strange Legal Drama, WSJ July 11, 2022