The problem with Elon Musk’s high stakes plan to pull out of $US44bn Twitter deal

It has been obvious, almost since the ink dried on his contract to buy Twitter for $US44 billion ($64 billion) that Elon Musk was looking for ways to either reduce the price or walk away from the deal.

On Friday Musk opted to try to walk away and to try to save more than $US10 billion of his net worth. The reason for Musk’s change of heart lies in what’s happened in the market, and to his own wealth, since he agreed to pay $US54.20 a share for Twitter in early April.

Elon Musk: Goodbye Twitter.Credit: AP

Virtually the moment he signed that deal, the overall US sharemarket, which had been falling since the start of this year, accelerated its decline. It has fallen a further 14 per cent.

The NYFANG index of the biggest technology stocks, which includes Twitter and Musk’s Tesla, has fallen about 24 per cent since early April. Tesla shares are down 34 per cent, wiping more than $US400 billion off a market capitalisation that was once $US1.2 trillion. Twitter’s share price, supported by the bid, has been sliding but it is down only about 6.4 per cent relative to its price immediately ahead of the bid.

That says that Musk got the timing of his offer and its value horrendously wrong. If he hadn’t bid and Twitter shares had tracked the Big Tech index they’d be below $US30 and, even if he maintained the original premium, he’d be paying something closer to $US40 a share, or more than $US10 billion less than he committed to.

Given that Musk was personally on the hook for the $US33.5 billion equity component of the bid unless he could lay off some of the exposure to third parties (in what was an increasingly difficult environment) and that the source of his contribution was a Tesla shareholding that has diminished in value by a third, who wouldn’t want to wriggle off the Twitter hook?

Musk is a most unusual and eccentric character, however, unafraid to thumb his nose at authority.

The problem for Musk – and it remains a very big problem – is that when he signed the deal he chose not to ask for due diligence; indeed he waived his rights to conduct any investigation of Twitter’s business and finances. He also agreed to a $US1 billion break fee, although that is only available as an exit option in quite limited circumstances.

Within weeks of agreeing the deal Musk started suggesting that Twitter’s estimate of the number of fake or spam accounts on its platform – no more than 5 per cent – was knowingly false and accusing Twitter of failing to comply with its obligation to provide him with sufficient information to make his own assessment of how prevalent those accounts were.

Late on Friday, Musk’s legal team declared his intention to terminate the merger agreement, reiterating his claim that Twitter hadn’t supplied him with sufficient information about the accounts and saying it was his belief that the portion of spam and fake accounts was “wildly higher” than the numbers Twitter has claimed.

They also referred to Twitter’s recent firing of two executives, its laying off of a third of its talent acquisition and the departures of several senior executives (reportedly because some of them didn’t want to remain in what they expected to be a Musk-owned Twitter) as material adverse changes to the business.

Musk signed a deal with very limited escape clauses and made an easy exit from it even more difficult by declaring back in April that: “I don’t care about the economics at all.”

It was planned as a vanity purchase by the world’s richest man at a time when his fortunes (and ego?) were riding high. Now he has buyer’s remorse.

The Twitter board have signalled that they aren’t going to let him off the $US44 billion hook easily, saying they would ask the Delaware courts to force him to honour the agreement. There is a “specific performance” clause in the agreement that purportedly enables Twitter to enforce the deal and its completion at the price and on the terms originally agreed.

Lawyers in the US have said it is almost, albeit not quite, without precedent that the courts would allow a merger agreement to be torn up.

Musk knows, with hindsight, that he offered at least $US10 billion, probably more, too much.

Musk is a most unusual and eccentric character, however, unafraid to thumb his nose at authority. He’s had running battles with the US Securities and Exchange Commission in the past, most notably over his 2018 tweets about his plans to take Tesla private (there was no actionable plan), which resulted in a $US40 million fine for Tesla (half of which he had to pay) and his forced stepping down as Tesla’s chairman, but no remorse. He’s demonstrated behaviours that suggest he sees himself as beyond the boundaries that apply to others; that rules are for the plebs, not uber-rich geniuses.

Can Twitter really enforce the deal? Even if the court ruled that Musk had to complete it, would he comply? What would or could the court do if he refused to comply? Fine him? Jail him? The stakes are massive.

Musk knows, with hindsight, that he offered at least $US10 billion, probably more, too much. Twitter knows that if Musk can extricate himself from the deal its shareholders will be at least $US16 billion worse off. They’ll be angry and the directors would be targeted with lawsuits if they don’t do everything they can to enforce the deal.

Musk might be trying to use the threat that he might be allowed to tear up the deal to bring the $US1 billion settlement option into play. From his perspective, that would be the least painful of the scenarios he faces.

For Twitter, however, that would be a paltry outcome for its shareholders, who would face a company whose value would have been savaged by the external environment and Musk’s increasingly aggressive critiques of its business model if not for the bid. It would guarantee shareholder actions against the board.

Perhaps there’s a settlement number between $US1 billion and $US44 billion or a revised-down bid price that Twitter would accept and Musk, begrudgingly, might consider as a better option than paying the full price, funded by a devalued currency (which means putting up far more of his Tesla shares), to acquire a business that’s now in worse shape than when the world’s richest man was riding high and decided it would be nice to own the world’s “digital town square”.

In the absence of an agreed settlement with a big price tag it might be years and tens, if not hundreds, of millions of dollars of legal fees before the face-off between Musk and the company he once desired is resolved. Inevitably, there will also be a plethora of the usual Delphic Musk tweets, whether relating to Twitter or anything else that might catch his attention.

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