Elon Musk Just Abandoned his Twitter Deal... What Next?

It was back on the 4th of April that Elon Musk first announced he was buying 9% of Twitter, a large yet relatively small ownership stake in the company. It was enough to be heard but not necessarily enough to be listened to. And to nobody's great surprise, this didn't actually sit all that well with Elon, one of the most strongly willed characters out there in the business world. So he decided to put in a bid to acquire the whole company for 44 billion dollars, a bid which was eventually accepted by the Twitter board.

But then something that no one expected happened: Elon announced on the 13th of May that he intended to pause and potentially withdraw his offer over concerns that Twitter's 229 million daily active users were actually comprised of very few real human beings. He posted to Twitter, quote, "Twitter deal temporarily on hold pending details supporting calculation that spam fake accounts do indeed represent less than five percent of users."

But now, just a few days ago, Elon Musk has announced he intends to abandon his takeover agreement altogether. On the 8th of July, Elon's legal team notified Twitter and the SEC that quote, "Mr. Musk is terminating the merger agreement because Twitter is in material breach of multiple provisions of that agreement, appears to have made false and misleading representations on which Mr. Musk relied when entering into the merger agreement, and is likely to suffer a company material adverse effect." Wow, things are heating up!

So let's dive into exactly what's going on now and what's likely to happen next, and then what we as investors should be watching. [Music] So yes, Elon Musk is seeking to terminate the merger agreement between his shell company X Holdings One and Twitter. Quite the 180 from where he was just a few weeks ago.

In fact, when Elon Musk first announced he was looking into the number of spam users on Twitter, it still seemed as though he intended to acquire the company. He quickly followed up that worrying original tweet by reassuring everyone that quote, "You know, he was still committed to the acquisition." And on the 21st of June, at the Qatar Economic Forum, he was able to clarify the status of the acquisition.

"If you look at the deal spreads at the moment, the investors seem to be betting that it won't happen, I suppose. So I like to be measured in my responses here such as not to generate incremental lawsuits. You've probably read about the question as to whether the number of fake and spam users on the system is less than five percent, as Twitter claims, which I think is probably not most people's experience when using Twitter. And that is a very significant matter, but we're awaiting resolution on that."

And then of course, there is the question of will the debt portion of the round come together and then will the shareholders vote in favor? So I think those are the three things that need to be resolved before the transaction can be completed. They are the three things that need to be resolved before the transaction can complete. That definitely sounded like a guy who still intended to go through the deal, but alas, it was not to be.

It turned out that the bots situation was the ultimate cause of Elon pulling the plug. Just to recap for those that don't know, Twitter states in their regulatory filings that they believe less than five percent of their users are fake accounts. And why that's relevant is because that's the number Elon Musk ran with to estimate the size of his offer.

However, Elon also wanted to do his own estimates on the number of fake accounts, so he started requesting more information from Twitter so he and his team could do their own analysis. This is where things start to get interesting because Elon is trying to ditch the agreement not because he's conclusively proven that fake accounts are less than five percent of users, but rather because of Twitter's inaction to provide the information he needed for his own analysis.

So buckle up! This is what the filing said: "Mr. Musk and his financial advisors at Morgan Stanley have been requesting critical information from Twitter as far back as May 9th, 2022, and repeatedly since then on the relationship between Twitter’s disclosed monetizable daily active users and the prevalence of false spam accounts on the platform. Since then, Mr. Musk has provided numerous additional follow-up requests, all aimed at filling the gaps in the incomplete information that Twitter provided in response to his broad request for information."

Notwithstanding these repeated requests over the past two months, Twitter has still failed to provide much of the data and information responsive to Mr. Musk's repeated requests, including but not limited to:

1. Information related to Twitter's process for auditing the inclusion of spam and fake accounts in MDAUs.
2. Information related to Twitter's process for identifying and suspending spam and fake accounts.
3. Daily measures of MDAUs for the past eight quarters.
4. Board materials related to Twitter's MDAU calculations.
5. Materials related to Twitter's financial condition.

So it sounds as though Elon was really trying to get to the bottom of this bot issue and gather as much relevant data as he could. But Twitter has just really dropped the ball and not given Elon the information he requested. The letter continues, quote: "In short, Twitter has not provided information that Mr. Musk has requested for nearly two months notwithstanding his repeat detailed clarifications intended to simplify Twitter's identification collection and disclosure of the most relevant information sought in Mr. Musk's original requests."

Based on the foregoing refusal to provide information that Mr. Musk has been requesting since May 9, 2022, Twitter is in breach of sections 6.4 and 6.11 of the merger agreement. Accordingly, Mr. Musk hereby exercises X Holdings One Inc's right to terminate the merger agreement and abandon the transaction contemplated thereby.

So interestingly, Elon is not seeking to terminate the agreement because the number of bots is conclusively higher than five percent of Twitter's daily active users, but actually because Twitter has repeatedly failed to comply with his request for information for him to be able to make his own judgment on the matter.

However, Elon's legal team definitely does go on to comment that despite not having all the information they wanted, they have still been able to do a preliminary analysis and found their estimates of bots to be much higher than five percent of users. The letter states, quote: "Twitter has repeatedly made statements in such filings regarding the portion of its MDAs that are false or spam, including statements that quote: 'We’ve performed an internal review of a sample of accounts and estimate that the average of false or spam accounts during the first quarter of 2022 represented fewer than five percent of our MDUs during the quarter.' And quote: 'After we determine an account is spam, malicious automation or fake, we stop counting it in our MDAU or other related metrics.'"

Mr. Musk relied on this representation in the merger agreement and Twitter's numerous public statements regarding false and spam accounts in its publicly stated SEC documents when agreeing to enter into the merger agreement. Mr. Musk has the right to seek recession of the merger agreement in the event these material representations are determined to be false.

Although Twitter has not yet provided complete information to Mr. Musk, it would enable him to do a complete and comprehensive review of spam and fake accounts on Twitter's platform. He's been able to partially and preliminarily analyze the accuracy of Twitter's disclosure regarding its MDAU. Preliminary analysis by Mr. Musk’s advisors suggests that the information provided by Twitter today causes Mr. Musk to strongly believe that the proportion of false and spam accounts included in the reported MDAU count is wildly higher than five percent.

Now, to be fair, they don't actually provide the results of this preliminary analysis, but it's interesting that they decided to say, you know, wildly higher than five percent. This definitely suggests that they believe Twitter's bot estimates are quite misleading. And because of that, and the fact that a wildly higher number of bot accounts makes a huge difference to the value of Twitter's business, the letter also states that if the estimates were to be false, that may constitute a company material adverse effect, which could give Elon Musk even further grounds to terminate the agreement.

So, those are the reasons for Elon Musk's withdrawal. Yes, he does believe the spam accounts are a lot higher than five percent, but the primary reason he's trying to terminate this agreement is because of Twitter's alleged lack of cooperation in giving him the details he needs to accurately judge the value of the company.

So that's the latest update from the Elon Musk camp. However, I do not think Twitter will let this go without a fight. You know, the stock price has already dropped five percent on the news; it's down another five percent in Friday after hours trading. So it's really in their best interest to fight this as hard as they can and try to force Elon Musk into the transaction as they'll effectively make a 57% return instantly if they're able to do that.

This is Twitter's chairman, Brett Taylor, talking at a conference before Elon Musk decided to withdraw. "Beyond what we've said in the proxy, I could just repeat that the board is committed to the transaction on agreed-upon terms. The market thinks that the chance of this deal progressing is fading. What is the percentage chance of Musk taking over the company? Well, look, we entered into a transaction and we intend to close the transaction. But has it stalled? As I said, I can't say beyond our public statements, and we're committed to the transaction on the agreed-upon term."

So you can tell he certainly wants this deal to go through because if we turn over to Simply Wall Street, we can see that he himself owns 2.1 million in Twitter stock. And if he and the board can fight Elon through the courts and force him to honor the agreement, they all stand to benefit. Brett himself would pocket more than a million bucks if they were able to force the acquisition for 44 billion dollars.

Also, just wanted to quickly say thanks to Simply Wall Street for providing these charts, and if you wanted to check out their research platform that you can see up on the screen right now, then feel free to follow the link in the description, and you can enjoy a nice discount if you want to sign up.

But back on the subject of management wanting to force the merger, interestingly, Brett Taylor in fact followed up the situation on Twitter just a few days ago, saying quote: "The Twitter board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery."

Now, whether that's just a legally required response or not, I don't know. However, it does make sense that Twitter will now try and force Musk into this agreement if they can, especially if they know in the back of their hand that the number of spam users really is a lot higher than five percent.

But that is where we're at. Hopefully, that gets you up to speed. I hope you guys enjoyed the video. We definitely haven't seen the last of this saga; you can definitely betcha bottom dollar there. So be sure to subscribe to keep up to date with what happens. But guys, apart from that, thanks very much for watching. That'll just about do us for this video, so hope you enjoyed, and I'll see you guys in the next one. What is that?