OK, I have gotten a number of messages over the last few days asking when I’m going
to admit I was wrong, because Elon has bought Twitter, and I said it was a terrible deal
and made no sense.
People are telling me that I don’t understand 4D chess – which is true – because that
is not an actual thing…
I’ve googled it.
So I’m here to say I was wrong, and you were right…
Elon has bought Twitter, Wait hold on… there is news…
It seems, Elon Musk – the founder of Twitter has put his takeover of Twitter – the company
that he founded “temporarily on hold” over concerns about the number of spam and
fake accounts on the social media platform.
He announced - on Twitter – which is his official communications platform - that the
deal is being held “pending details supporting” a calculation in the company’s regulatory
filings suggesting that the number of fake accounts on the platform represents under
5 per cent of its 229mn users.
Now like I said, I don’t know much about 4D chess, but when I look in a regular chess
manual, it says that temporarily on hold is against the rules of the game.
Elon has – since my last video – entered into a legal contract requiring him to buy
Twitter.
I even have the contract right here – I was lying about it being a chess manual, it’s
a contract.
And essentially in section 6.3 it says that the parties to the contract have to make their
best efforts to close the deal at the agreed price.
There is no section in there about “temporary holds” Temporary holds are not a thing.
OK, so can he back out of the deal if more than five percent of the active accounts on
twitter are bots?
Well, not really.
The five percent figure is disclosed in Twitters securities filings, and it has been in all
of their filings going back to 2014, along with a footnote disclosure that “in making
this determination, we applied significant judgment, so our estimation of false or spam
accounts may not accurately represent the actual number of such accounts, and the actual
number of false or spam accounts could be higher than we have estimated.
Now, the merger agreement does contain a provision that allows the buyer to back out if Twitter’s
securities filings are false but only if the inaccuracy would have a “Material Adverse
Effect” on the company.
A Material Adverse Effect under Delaware Law is something that would “substantially threaten
the overall earnings potential of the target in a durationally-significant manner.”
Historically this has been a high bar and a Material Adverse Effect has had to show
a 40% or greater decrease in long-term profitability.
So even if 25% of twitters active users turn out to be bots, the deal has to go through.
Now, so far today, there have been no securities filings about the deal being “on hold,”
and no press release from Twitter, but something will likely come out soon.
In most merger agreements there is a clause saying that the buyer and seller will consult
with each other before issuing press release or making public statements about the deal.
Amusingly this agreement has such a clause, but there is a carve out for Musk saying that
he can Tweet about the deal as long as the Tweets don’t disparage the Company or any
of its Representatives.
So, yeah…
So, can Elon just pay the billion dollar deal break fee and walk away, well according to
the contract no.
The contract gives Twitter the right to force him to close, and put up the $27.5 billion
dollars he has committed, as long as his debt financing comes through.
The contract gives Twitter the right to go to court to force him to try to get that debt
financing and he should be able to get that debt financing as his banks have signed reasonably
unconditional commitment letters.
So contractually, this deal should go through, and Twitter should reasonably be able to sue
and win, but just because that is what is required by law, doesn’t mean it is what
will happen.
Like I said in my video a few weeks ago, this deal is really dumb.
I described it as being a whimsical offer from the start.
The deal spread was wide to start with and only widened over time, as no one serious
wanted to bet their Money that Elon Musk would do what he said he would do.
He has violated all sorts of securities laws so far in the deal, and he will likely get
hit with some small fines from the SEC and the FTC over those infractions.
There is a decent chance that he will offer $42.69 a share next week, there is a good
chance that he will just walk away from the deal.
Twitter can sue him, they are in the right, but they probably wont…
This is a dumpster fire of
a deal…