Elon Musk is officially trying to end his bid to buy Twitter. After Musk’s legal team made it clear in tweets attacking Twitter over its bot calculations and an ominous story in The Washington Post this week that he no longer wanted the company to attack Twitter over its bot calculations, Musk’s legal team is taking action to end its $44 billion deal to buy Twitter.
“Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of several terms of that Agreement, appears to have made false and misleading statements on which Mr. Musk relied in entering into the Merger Agreement, and is likely to suffer material disruption to the Company ‘ Musk’s attorneys wrote in a letter to Twitter’s Chief Legal Officer Vijaya Gadde.
Musk cites his unsubstantiated claims that Twitter is misleading investors and users about the number of fake accounts on its platform, which the company has long estimated is below 5%. Musk had no apparent concerns about Twitter’s bot count before signing the deal, even mentioning that he plans to tackle the platform’s spam problem as the company’s new owner.
It’s widely believed that Musk wants out because markets plummeted shortly after the terms of the deal were agreed, also blowing up a large chunk of his Tesla billions. Shares of the electric vehicle maker halved between April and late May and have not recovered since. By mid-May, Twitter’s stock price had fallen to less than $40 per share — a significant discount to the $54.20 per share Musk agreed in late April.
Nonetheless, Musk’s argument is essentially that Twitter misrepresented its monetizable daily active user count, thereby violating the terms of the deal:
Twitter is in breach of the merger agreement because the merger agreement contains manifestly inaccurate representations. Specifically, in the Merger Agreement, Twitter stated that no documents that Twitter has filed with the US Securities and Exchange Commission since January 1, 2022 contain a “false statement of material fact” (Section 4.6(a)). Twitter has repeatedly made statements regarding the portion of its mDAUs that are false or spam in such filings, including the following statements: “We conducted an internal review of a sample of accounts and estimated the average of false or spam accounts in the first quarter of 2022 accounted for less than 5% of our mDAU in the quarter.” and “Once we determine an account is spam, malicious automation, or forgery, we no longer count it in our mDAU or other related metrics.” Mr. Musk braced himself this depiction in the merger agreement (and Twitter’s numerous public statements about false and spam accounts in its publicly filed SEC filings) when it agreed to enter into the merger agreement. Mr. Musk has the right to request the termination of the merger agreement if these material representations are found to be false.
Musk’s legal team further alleges that Twitter did not give him sufficient access to his data to conduct his own analysis, although it’s not clear how that analysis would differ from Twitter’s own longstanding methods. The letter also states that Twitter told Musk in an unreported phone call that the company included suspended accounts in its monetizable daily active user counts, citing it as proof of its allegations that the company’s counts are incorrect.
… Twitter’s disclosure that it will stop counting fake or spam users in its mDAU if it determines those users are fake appears to be incorrect. Instead, based on what Twitter said during a call with us on June 30, 2022, we understand that Twitter includes accounts that have been suspended — and therefore known to be fake or spam — in its quarterly mDAU count, even if it is is aware of suspended accounts were included in mDAU for this quarter.
Bret Taylor, Twitter’s chairman of the board, responded to Musk’s letter on Friday by restating the company’s intentions to go through with the deal. “Twitter’s board of directors is committed to completing the transaction at the price and terms agreed with Mr. Musk and plans to take legal action to enforce the merger agreement,” Taylor wrote. Twitter CEO Parag Agrawal retweeted Taylor’s tweet.
Twitter’s board of directors is committed to completing the transaction at the price and terms agreed with Mr. Musk and plans to take legal action to enforce the merger agreement. We are confident that we will prevail in the Delaware Court of Chancery.
– Bret Taylor (@btaylor) July 8, 2022
Agrawal previously denied Musk’s accusation that Twitter undercounted fake accounts and described it the company’s methodology, which generalizes data for the entire platform based on a random sample of accounts. “We do not believe that this specific estimate can be performed externally given the critical need to use both public and private information (which we cannot share),” Agrawal tweeted May. “Externally, it’s not even possible to know which accounts are counted as mDAUs on any given day.”
It’s far from obvious that Musk’s unfounded criticism of Twitter’s bot counts is seen as a valid reason to end the deal, especially given that Twitter is keen to see it through. For better or worse, we’ll be hearing a lot more about this argument in the coming days as Musk and Twitter begin to sort out the messy, months-long ordeal in court.
The story unfolds…