Elon Musk has threatened to pull out of his deal to acquire Twitter over allegations that the company has been suppressing the number of fake accounts on its platform.
In a letter sent to Vijaya Gadde, Twitter’s Chief Legal Officer, and filed with the Securities and Exchange Commission, Musk’s attorney Mike Ringler accused Twitter of a “material breach” of its obligations under its merger agreement with Musk for the acquisition. He wrote that Twitter had refused to provide Musk with data on fake accounts and tried to “obfuscate and confuse” the issue. Musk had, on May 13, announced that his acquisition of Twitter was “on hold” as he tried to assess Twitter’s active user base.
Twitter, per Musk’s letter, had instead offered to provide information on methods to test for fake accounts, which Musk’s team had rejected. In the letter, Ringler wrote that Twitter’s refusal was “causing further suspicion that the company is withholding the requested data due to concern for what Mr. Musk’s own analysis of that data will uncover.”
He added, “If Twitter is confident in its publicized spam estimates, Mr. Musk does not understand the company’s reluctance to allow Mr. Musk to independently evaluate those estimates.” In response to a press inquiry, a Twitter spokesman did not answer National Review‘s questions about the sharing of data.
Musk had previously alleged that the number of fake accounts or ‘bots’ – created by other computers for the purpose of advertising and spam, and not accessed by real persons – on Twitter may be as high as 20 percent, versus the 5 percent figure cited by Twitter. If true, the number may have the effect of reducing Twitter’s share price, thereby increasing the relative premium of Musk’s acquisition. His offer to purchase 100 percent of Twitter stock at $54.20 a share – worth $44 billion – is 27 percent above the current price of $39.39, versus 18 percent at the time of his offer. Twitter’s stock has been declining in value since May 6th.
The cost of the acquisition for Musk – the world’s richest man – has, so far, been significant. After initially planning to finance 28 percent of the purchase with margin loans – i.e., loans secured against his stock in Tesla, Inc., the bulk of his net worth – Musk restructured the bid on May 25 to remove the loans, following a 36.1 percent decline in Tesla’s stock price. Part of the restructuring included bringing in 19 new institutional investors to fund the acquisition.
These difficulties, along with Musk’s placement of the deal on “hold,” had raised fears that Musk may terminate the deal with Twitter, which Musk had initially claimed was being undertaken to improve Twitter’s policies on free speech. Though Musk had previously Tweeted that he was “still committed to acquisition,” Monday’s letter confirms that he is actively considering an exit. Ringler wrote that Musk “reserves all rights resulting therefrom, including his right not to consummate the transaction and his right to terminate the merger agreement.”
The agreement specifies that a party responsible for a “material breach” that results in termination must pay a $1 Billion fee to the other. However, the deal must close by October 24, 2022, the date the agreement expires, for the fee to be payable.
Any termination of the merger agreement, which does not permit withdrawals, would likely be contested by Twitter in federal court – per a source at a Wall Street investment bank with a large stake in Twitter – especially, given Musk’s accusation of Twitter’s liability. In that scenario, however, observers expect a massive decline in Twitter’s stock price, raising the likelihood of a settlement with Musk beforehand. Twitter has informed National Review that it intends to “enforce the merger agreement at the agreed price and terms.”