Elon Musk threatens to abandon Twitter takeover accusing social network of ‘material breach’, claiming it failed to provide details of fake accounts.
Elon Musk has threatened to walk away from his $44 billion acquisition of Twitter (NYSE: $TWTR), complaining that the social media company has failed to provide sufficient information about spam and fake accounts.
Musk has repeatedly criticized Twitter’s claim that less than 5% of its monetizable daily active users are bots, warning last month that his takeover “cannot move forward” unless the platform provides proof.
In a letter to Twitter’s chief legal officer that was disclosed in a regulatory filing on Monday, Musk’s lawyers at Skadden, Arps, Slate, Meagher, and Flom wrote that the Tesla chief believes the company has “refused to provide the information that [he] has repeatedly requested since May 9”.
Since Musk and Twitter announced the deal in April, shares in Tesla along with high-growth tech companies have fallen sharply.
Twitter’s shares were 4% lower on Monday at $38, well below Musk’s $54.20 offer price.
Observers have noted that Musk, because of the market turmoil, may try to find an excuse to reduce the transaction price or walk away altogether.
Musk’s lawyers said that Twitter was “actively resisting and thwarting his information rights (and the company’s corresponding obligations) under the merger agreement” and this “clear material breach of Twitter’s obligations” would allow Musk to “terminate the merger agreement”.
The letter broaches the idea that the deal financing from Wall Street banks could be at risk if Twitter does not furnish the information that has been requested.
“As Twitter’s prospective owner, Mr. Musk is clearly entitled to the requested data to enable him to prepare for transitioning Twitter’s business to his ownership and to facilitate his transaction financing,” Skadden wrote in its letter.
It is not straightforward for Musk to escape his obligation to close the transaction. A financing failure may provide one route, although it would still involve him paying a $1 billion termination fee.
Such legal maneuvers to walk away from transactions rarely work but Musk may be seeking negotiating leverage to force Twitter into a settlement that would allow him to pay to escape from buying the company.
One top Wall Street lawyer who is not involved in the deal said: “It’s hard to see how financing sources need this info given Twitter has been able to raise debt and equity to date, and they are definitely not entitled to it under their commitment letter. But it’s something of a self-fulfilling prophecy in that Elon demanding it will make the banks want it, etc. So they can indeed collude to make a mess of it.”
Twitter did not immediately respond to a request for comments.
The watertight merger agreement makes it incredibly hard for Musk to get out of the deal as the agreement basically says Twitter can force him to go through with the transaction, like it or not.
What Twitter can’t do is force Musk to go ahead with the deal if the banks (i.e. the institutions providing $13 billion in financing) decide to walk away. He would just have to pay the $1 billion termination fee, which is probably preferable to being forced to buy a company worth perhaps 27% less than what Musk agreed to pay in April.
Where does this leave Twitter?
The company insists that it will hold Musk to the original merger agreement. No prizes for guessing why. If the deal for some reason falls through, it’s very likely that Twitter’s share price will sink and other buyers will circle.
Musk could be playing games, Musk could have gotten cold feet, or Musk could be very serious – it is hard to tell as always with him.
Anyone who’s really worked with the Twitter platform knows that it’s crawling with bots and that the number is likely to be larger than just 5% of Twitter’s total monetizable audience.
If Musk truly cares about free speech – he could be stubborn enough to want to teach Twitter a valuable lesson that they shouldn’t lie about their platform (least of all to him), by demanding the numbers that will expose the grey side of Twitter and social media platforms in general.
He could also be inclined to attempt renegotiating the takeover price, in light of the new information and given the current market circumstances.
Either way, if Musk really wants to acquire Twitter, he will close the deal – everything else is just noise and negotiation tactics.
Source: Financial Times, by Tim Bradshaw and Sujeet Indap and Ortenca Aliaj.