Elon Musk is running out of ways to evade his original US$44-billion contract to buy Twitter.
The world’s richest man, who was in a rush to acquire the social network in April and then abruptly soured on the deal, spent months trying to exit the obligation entirely. In recent weeks, both sides discussed a price that was about $4 below the $54.20/share accord, but couldn’t agree on additional terms, according to people familiar with the matter.
On 3 October, Musk applied public pressure by formally re-offering to buy the company at the original price, aiming to avoid a 17 October fight in a US court. Twitter’s stock shot up, with investors sensing the drama was nearly over. But the company’s lawyers, suspicious of conditions in Musk’s letter, including the stipulation that Twitter drop its lawsuit, called it “an invitation to further mischief”.
“Plot twist!” Musk tweeted.
Behind the scenes, Twitter’s lawyers raced to verify Musk’s renewed affinity for the deal, checking whether he had indeed asked lenders for the money they had earlier committed (one bank said he hadn’t, Twitter says). Those same big banks tried to tally up potential losses on the months-old deal terms, while Twitter employees, still in limbo, turned to memes and gallows humour to get through the week.
By the night of 6 October, the billionaire finally got something he wanted: a delay of the trial. There, a judge would have scrutinised all his reasons for backing away from the deal in full view of the public and the media. In return, Musk was given a new, court-issued deadline of 28 October to make good on his promises. If he and Twitter don’t complete the transaction by then, he’ll likely be on the witness stand in November.
The shift buys Musk time. And if he really doesn’t want to go to court, it also edges Twitter shareholders closer to a payday. “At $54.20 cash deal price closing this year, it is good to be long TWTR!,” Kevin Stadtler, CEO of Twitter investor Stadtler Capital, celebrated in an e-mail.
Someone has to budge
There’s still “a 10% chance that Musk is trying a clever end-around to exit the deal”, according to Gene Munster, managing partner at Loup Ventures. A person familiar with his strategy says one possible scenario still involves Musk getting the deal at a lower price. But Musk shows signs he’s resigned himself to owning the product; his public commentary has shifted from critiquing the social network to talking about its future under him, as part of an “everything app” called X, with “very fast” product development, according to his tweets this week.
Now, one of the parties has to budge. Musk wants to add that the deal should be contingent on him receiving $13-billion in debt financing, but the original contract didn’t contain that stipulation, so Twitter isn’t interested in allowing it. Musk is also seeking to reserve his rights to file a fraud suit over his claims the platform’s executives misled him and other investors about the number of spam and bot accounts among its more than 230 million users. Again, based on Musk’s track record, the company has little reason to agree.
Within Twitter, employees have spent the week debating the real agenda behind Musk’s latest change of heart. Many believe it’s a play for time, with Musk conscious he was unlikely to win at trial and looking for options that would allow him to pull out at a later date. Some former Twitter staffers expressed relief at getting out before the whiplash of Musk’s public statements, as well as all the distraction and stress that his eventual ownership would likely entail.
Those who remain are bracing for cuts. If the deal closes very soon, a number of Twitter employees are worried they will be laid off before they have a chance to vest their restricted stock units, a milestone scheduled for the start of November, people familiar with the matter said. Employees are especially concerned in departments related to policy, communications and marketing; Musk said in a tweet that at his version of Twitter, “software engineering, server operations & design will rule the roost”.
If the acquisition goes forward, banks led by Morgan Stanley stand to lose, also — potentially more than $500-million. With yields at multi-year highs and the new closing date fast approaching, the financial institutions will probably have to directly fund the debt they could otherwise sell to investors.
Still, one of Musk’s bankers complained privately on a call with a reporter that he was sick of the entire saga and hoped it would end soon. A second banker was bewildered, saying they hadn’t thought about the deal in months while overall market conditions worsened. Others were harder to reach, saying they’d been advised not to speak, given how tenuous the situation had become.
Despite edging closer to a deal, talks remained contentious. “Twitter offered Mr Musk billions off the transaction price. Mr Musk refused because Twitter attempted to put certain self-serving conditions on the deal. Any statement to the contrary is a lie,” Musk’s attorney, Alex Spiro of Quinn Emanuel Urquhart & Sullivan, said in a statement on 6 October. While there were talks between the two parties about a price cut, Twitter insisted the offer would have to remain above $50/share, according to people familiar with the matter. Since then, the talks have been focused on preventing Musk from finding an out from the deal, the people said.
Musk has indicated, via filings and delays, that he is in no rush to be in front of a judge. The billionaire recently had a trove of hundreds of personal text messages become public as part of the court process, revealing negotiations with his business contacts and chatter with friends. Any further court movement could mean more private matters are exposed.
Just days before reviving his $54.20 bid, Musk’s deposition was cancelled and rescheduled multiple times
The Tesla CEO’s legal team was perhaps already getting the sense that the case was not going well, as judge Kathaleen St J McCormick sided repeatedly with Twitter in pretrial rulings, according to one person familiar with the situation. Even with the late emergence of a Twitter whistle-blower who alleged executives weren’t forthcoming on security and bot issues, there were concerns Musk’s side would not be able to prove a material adverse effect, the legal standard required to exit the contract.
Just days before reviving his $54.20 bid, Musk’s deposition was cancelled and rescheduled multiple times — first because of the location (Delaware) and then, later, because the lawyer who was slated to question him had been exposed to Covid-19, according to people familiar with the matter and court filings. Musk’s lawyers say they weren’t made aware of the exposure until they were already en route to San Francisco, presumably for the deposition of Twitter CEO Parag Agrawal, which was slated for the following morning. Agrawal ended up rescheduling his questioning as well, for 3 October.
For his part, Musk says in court filings that he has been “working diligently, cooperatively and in good faith with the financing banks to prepare for the closing”, but that it will take time because the parties are “working through the complex process” of drafting documents, arranging security interests for a portion of the debt financing, and “finalising funding mechanics”. He said that attorneys for the financing banks estimated they’ll need until 28 October to fund the loans. He also said that the lawyers have advised that each of their clients is “prepared to honour its obligations” under their debt commitments.
Twitter isn’t buying it. In its 6 October response, the company said a banker involved in the debt financing testified that day that Musk had yet to send them a borrowing notice and had otherwise not communicated that he intended to close the deal. The banker also said that “the main task necessary to close the deal — memorialising the debt financing — could have happened in July but didn’t because Mr Musk purported to terminate the deal”, according to Twitter.
Now there’s an official deadline, per the judge: 5pm local time on 28 October.
Investor Stadtler, whose firm manages $80-million, said he’s pleased with the outcome so far — but he doesn’t want Musk to run the next version of Twitter. He “carelessly entered into a merger agreement and overpaid for the asset”, Stadtler said. “One of Musk’s advisors should have used the most important word for investing: ‘No.’” — Sarah Frier, Katie Roof and Kurt Wagner, (c) 2022 Bloomberg LP