At the steep price tag of $44 billion, Elon Musk planned to acquire ownership over media-conglomerate Twitter and simultaneously make it the biggest take-private deal in nearly 6 years. A take-private deal entails a publicly traded company having most or all of its shareholder positions liquidated via a source of private equity (usually involving lots of debt). The company’s status is converted to privately owned and operated, meaning it can’t be traded universally on the open market.
However, on Friday, July 8, just months after shocking the finance world with his acquisition, the eccentric billionaire abruptly terminated the deal and proceeded to void all prior obligations to the company and its board.
It’s no secret that many viewed Musk’s agreed per share price ($54.20) as nothing short of generous and even unprecedented given the current financial state of the company. Currently, his bid would sit at roughly a 47% premium (as of July 13). Despite the skepticism throughout the negotiation process, Musk constantly cited his commitment to promoting freedom of speech, dispelling censorship, and removing fake or bot accounts from the platform.
After months of public disputes and commonly held qualms regarding the bid, the deal was finally set to go through after Elon secured enough debt through financial institutions and banks in tandem with his own large pool of personal capital. This included ~$7 billion from other notable tech moguls such as Larry Elison (Oracle co-founder), Sequoia Capital (a successful VC firm known for early investments in tech companies such as Google, Instagram, LinkedIn, and Zoom), and Binance (a cryptocurrency trading-platform). In addition to backing up his proposal with potential money, Musk also substantiated his bid with the lofty commitment to double Twitter users by 2025.
It doesn’t take an expert to realize this deal has been anything but healthy from the get-go. The board went from implementing a poison pill to block Musk’s takeover, to hurriedly pushing the deal through just days later. Despite these signs of uncertainty, many skeptics and admirers alike were finally convinced the deal would go through, until May 13, when Musk began casting doubt on the validity of his agreement with Twitter. He claimed Twitter was falsely under-reporting the number of their total accounts comprised of bots, who had previously asserted a number sub 5% of total users.
Due to his previously bold and outlandish promises regarding the future of the company under his leadership, many thought that the purpose of this claim was to leverage Twitter’s board of directors and strongarm them into offering a bargained takeover price.
Common shareholders were displeased by Musk’s apparent reluctance to follow through and even accused the spirited billionaire of artificially “manipulating” the stock price through the means of a class action lawsuit. A securities class action lawsuit is when a large group of plaintiffs band together to seek compensatory damages or reparations. These damages are meant to negate a loss they incurred by means of stock manipulation or otherwise illegal activities.
Finally, all of the shareholder’s fears came to fruition when Musk officially announced the deal would be abandoned as Twitter had failed to comply when it came to reporting pertinent information about fake (bot) accounts. However, this far from ended Elon’s bout with Twitter.
Subsequently, after Musk abandoned the deal, Twitter filed a lawsuit against him to force the deal through at the agreed price of $44 billion. The suit was filed on Tuesday, July 12, in Chancery Court, Delaware, and will be presided over by Kathaleen McCormick.
Already, the two sides have begun feuding over minutia indicating a likely rough and turbulent road to a resolution. Twitter wants the 44-year-old Chancellor out of Delaware to begin the hearing no later than September, as the deal was set to go through in late October. However, the Musk procession says that the impending legal situation constitutes a delay so that they have more time for discovery. On the 19th, Twitter scored an early victory, when the judge denied Musk’s motion for postponement, and set the trial to begin in October.
In the suit, Twitter has no reason to oppose his claims that they didn’t use a rigorous enough process to procure the number of fake accounts for Musk. Contrary to popular belief, Musk’s official proposal to Twitter had no mention of bots at all and certainly didn’t specify to what extent Twitter would have to disclose their information. Ignoring this sloppy mistake, Musk has propagated the false narrative that the burden was on Twitter to accurately disclose these figures. He might take aim at the court of public opinion because he has better odds of winning there than in the court of law.
Twitter opposed yet another contention of Musk regarding their negligence in not alerting him of the firing of two senior executives. Twitter claims that contrarily Elon and his lawyers were well aware and didn’t indicate it would be a problem.
Twitter’s largest card-to-play exists in the form of a performance clause from the acquisition. A performance clause is a legally binding obligation that one party must fulfill as agreed upon in the contract. Specifically, one stipulation Musk previously put in place to appease apprehensive board members was that they were able to sue him to force the deal to go through if he had the necessary debt secured to make it happen (which he currently does).
Penalties and Alternative Outcomes
Unfortunately, for those who eagerly await a satisfying conclusion to this dramatic saga, it is possible (and even likely) that neither of the previously mentioned extremes results from the case. As opposed to Musk having to buy Twitter at the original asking price or getting off the hook entirely, there is a scenario where he is merely fined no more than $1 billion; yet another more likely conclusion is where Twitter and Musk simply renegotiate the terms of their deal down to a smaller valuation.
Musk and Controversy
Controversy is nothing new to Elon Musk. In fact, it seems as if his name comes up in an unflattering light in some way or another almost ad-nauseam. Much to the dismay of SEC and other regulatory groups, Musk is known for leveraging his large social media platform to influence financial markets in his favor and partake in otherwise unlawful activities. In 2018 he was forced to resign as Chairman of Tesla after a tweet that resulted in fraud charges levied against him for announcing that he intended to take Tesla private. Furthermore, Musk has been scrutinized and accused of using Tesla’s vast capital in 2016 to “bail out” SolarCity, a wavering company run by his cousin. Simply relating to this deal alone, the SEC has already launched a new investigation into Musk and whether or not he reported his previous additions to his Twitter positions in a proper manner.
Implications for Twitter and Effect on Shareholders
Regardless of which way the legal pendulum swings, there is no doubt that there are already millions shortchanged by this ordeal: the shareholders. Since the deal was first publicly proposed, Twitter has been extremely volatile and is currently down >16% from April 14. While shareholders are surely displeased, some may use this experience as a growing opportunity. It is possible that in the future they will be more vigilant and wary when a mega-billionaire with a taste for drama comes sniffing around their company.