The ink is barely dry on the agreement signed by both Twitter and Elon Musk. Musk’s deal to purchase Twitter for roughly $44 billion was finalized only in April of this year. But by May, Musk was already raising concerns, placing the agreement on hold. Claiming Twitter was not providing adequate transparency of agreed-upon information, Musk tapped on the brakes. But seemingly, Twitter responded, providing Musk’s legal team with vast data regarding the company’s 500 million tweets a day. So, it seemed all was going well and back on track, at least until this past week. Now, Musk is backing out on the deal completely, and Twitter plans to take him to court. Forget the honeymoon… it seems Musk and Twitter are going straight to their divorce attorneys.
While no one knows how things will unfold from here, a few scenarios seem most plausible. It’s definitely worth noting that the price of Twitter shares has fallen substantially since April. They are currently trading around $37 a share, which is far less that the purchase price of $54.20 a share. The drop in the price of Twitter shares is certainly a motivating factor for Musk to walk away. Going through with Musk’s deal as it was originally constructed will cost him dearly. But at the same time, walking away from the agreement will have tremendous effects on current shareholders and employees. Therefore, determining the best course of action requires looking at the current situation from all sides.
“[Twitter] would much rather have the $54.20 without a court fight, but it’s worth fighting over. [A selling share price of] $54.20 seems like an unbelievable deal for Twitter. So there is a lot that they could sacrifice that would still make it worth it in the end if they got to force Musk to close.” – Ann Lipton, Business Law Professor at Tulane University Law School
Twitter – A Scorned Bride-to-Be
From Twitter’s perspective, allowing Musk’s deal to go unpunished is simply not an option. Let’s back-track a bit. At the time of the original proposal, the price of Twitter shares was much higher than $54.20. In fact, Twitter shares were trading above $70 most of 2021. Therefore, when Musk first negotiated the merger agreement, Twitter believed it was making some sacrifices. But because the agreement awarded Twitter’s shareholders a locked-in share purchase price in a volatile market, it made logical sense. Of course, Musk’s deal is even more attractive now that the price of Twitter shares is around $37.
The saving grace for Twitter is specific performance clauses in Elon Musk’s deal. The agreement that both parties signed requires that either must pay $1 billion should they break the contract. That means that Twitter at a minimum should be able to recoup this amount, even if it requires going to court. But this would hardly satisfy the board’s fiduciary duty to its shareholders. Shareholders expect a buyout at a $54.20 price of Twitter shares. A fine of $1 billion would hardly ease shareholder pain since shares have fallen about $20 below this amount. For this reason, expect Twitter to go full-court press when it comes to Musk’s deal. Their pride and reputation is at stake, and taking a passive approach is not an option.
“Sometimes Twitter has ignored Mr. Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr. Musk incomplete or unusable information.” – Mike Ringler, Attorney for Elon Musk
Elon Musk – A Groom with Nervous Feet
When Musk’s deal was first pursued, it took everyone by surprise. Musk is already the world’s richest man for his accomplishments at SpaceX and Tesla. Why would he want to pursue a social media company? But then again, it’s Musk, a well-known mercurial persona who’s seemingly not averse to any risk. Whatever his reasons may be, Musk pursued Twitter and offered a deal that Twitter couldn’t refuse. At the time, it seemed a bit of a win-win, given the price of Twitter shares at the time. But then things changed.
After spending some time with Twitter, Musk began to worry that his valuation of the company was excessive. The price of Twitter shares began to drop along with other tech stocks. Inflationary pressures and his potential takeover of the company drive down investor value perceptions. Musk then demanded greater disclosure from Twitter about its spam and bot accounts. Twitter has always publicized these represent less than 5% of all accounts, and they granted Musk’s team greater access. But the degree of transparency wasn’t to Musk’s satisfaction. In both instances, Twitter simply doesn’t look as attractive to Musk anymore. And because of that, he would prefer to walk away from the altar altogether.
“His engagement with Twitter took a severe toll on the company. Employees, advertisers and the market at large cannot have conviction in a company whose path is unknowable and which will now go to court to complete a transaction with a bad-faith actor.” Jason Goldman, Member of Twitter’s Founding Team
Twitter Employees – The Forgotten Children
As with any nasty breakup, there is secondary damage. In the case of Musk’s deal, that damage appears to be on Twitter’s employees themselves. When Musk first signed the merger agreement, his position on remote work and employees in general had many worried. Some left immediately while others have been let go in an effort to streamline costs. But now that Musk wants to walk away, and the price of Twitter shares have fallen, pressures are even greater. Morale at Twitter is at an all-time low, and no one sees the future as bright. Regardless of whether reconciliation occurs or not, some damage has already been done.
Predicting what will happen next is certainly difficult to say the least. For Twitter, they must save face and perform their fiduciary duty to investors. That will likely mean taking Musk to court or renegotiating a new deal. A $1 billion termination fee is simply not enough in this regard. For Musk, he may have little choice but to proceed with the deal if a court rules accordingly. But it is likely his current tactics are part of a larger plan to renegotiate current terms with Twitter. If a purchase is forced without renegotiations, Musk’s enthusiasm for the company isn’t likely to be impressive. And this doesn’t bode well for the company or its employees. Time will tell what the final outcome will be. But like most breakups and divorces, it’s probably going to get pretty nasty.