Elon Musk is officially trying to end his bid to buy Twitter. After strongly hinting that he no longer wanted the company in tweets attacking Twitter for its bot computing and an ominous story in The Washington Post this week reflecting his thinking, Musk’s legal team is taking steps to end his $44 billion deal for buying twitter.
“Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of numerous provisions of that Agreement, appears to have made false and misleading statements relied upon by Mr. Musk in entering into the Merger Agreement, and is likely to suffer material adverse consequences for the company,” Musk’s lawyers wrote in a letter to Twitter Chief Legal Officer Vijaya Gade.
Musk pointed to his unsubstantiated claims that Twitter misled investors and users about the number of fake accounts on its platform, which the company has long estimated at less than 5%. Musk had no apparent concerns about Twitter’s bot count prior to the deal, and in fact mentioned that he planned to take on the platform’s spam problem as the company’s new owner.
It’s widely believed that Musk wants out because markets plunged shortly after the terms of the deal were agreed, taking a hefty chunk of his Tesla billions over the cliff as well. Shares in the electric vehicle maker fell in half between April and the end of May and haven’t recovered since. By mid-May, the price of Twitter’s own stock had fallen to less than $40 a share — a significant discount from the $54.20 a share Musk agreed to in late April.
However, Musk’s argument is essentially that Twitter misrepresented its insurable daily active users and thereby violated the terms of the deal:
Twitter is in breach of the Merger Agreement because the Merger Agreement appears to contain materially inaccurate statements. Specifically, in the Merger Agreement, Twitter stated that no document that Twitter has filed with the US Securities and Exchange Commission since January 1, 2022 includes any “false statement of a material fact.” (section 4.6(a)). Twitter has repeatedly made statements in similar filings about the fraction of its mDAUs that are fake or spam, including statements that: “We conducted an internal review of a sample of accounts and estimate that the average number of fake or spam accounts in the first quarter of 2022 . accounted for less than 5% of our mDAU in the quarter,” and “Once we determine that an account is spam, malicious automation, or fake, we stop counting it in our mDAU or other related metrics.” Mr. Musk relied of that representation in the Merger Agreement (and Twitter’s numerous public statements about fake and spam accounts in public SEC filings) when it agreed to enter into the Merger Agreement. Mr. Musk has the right to seek rescission of the Merger Agreement in the event these material statements are determined to be false.
Musk’s legal team continues to argue that Twitter didn’t give it enough access to its data to conduct its own analysis, though it’s unclear how that analysis would differ from Twitter’s own long-standing methods. The letter also states that Twitter told Musk in an unreported phone call that the company includes suspended accounts in its monetizable daily active user numbers, and points to that as evidence for his allegations that the company’s count is not above board.
… Twitter’s disclosure that it stops counting fake or spam users in its mDAU when it determines that those users are fake seems false. Instead, we understand, based on Twitter’s statements during a conversation with us on June 30, 2022, that Twitter includes accounts that have been suspended — and are therefore known to be fake or spam — in its quarterly mDAU count. even when it is aware that suspended accounts were included in that quarter’s mDAU.
Brett Taylor, the chairman of Twitter’s board of directors, responded to Musk’s letter on Friday by doubling down on the company’s intentions to make the deal happen. “Twitter’s board is committed to closing the transaction at the price and terms agreed upon 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 has committed to closing 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.
— Brett Taylor (@btaylor) July 8, 2022
Agrawal previously dismissed Musk’s accusation that Twitter was underreporting fake accounts, describing the company’s methodology, which aggregates platform-wide data based on a random sample of accounts. “We do not believe this particular assessment can be done externally given the critical need to use both public and private information (which we cannot share),” Agrawal tweeted in May. “Externally, it’s not even possible to know which accounts count as mDAUs on any given day.”
It’s far from obvious that Musk’s unwarranted criticism of Twitter’s bot count would be considered a good enough reason to end the deal, especially given that Twitter wants to go through with it. For better or worse, we’ll hear a lot more about that argument in the coming days as Musk and Twitter begin to resolve the messy, months-long court trial.
The story unfolds…
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