The Elon Musk/Twitter merger is off-again.
“We refer to (i) the Agreement and Plan of Merger by and among X Holdings II, Inc. dated as of April 25, 2022 (the “Merger Agreement”) and (ii) our letter to you dated as of June 6, 2022 (the “June 6 Letter”),” wrote Elon Musk’s attorneys in a letter sent to Twitter, Inc. on July 8, 2022.
“As further described below, Mr. Musk is terminating the Merger Agreement because Twitter is in material breach of multiple provisions of that Agreement, appears to have made false and misleading representations upon which Mr. Musk relied when entering into the Merger Agreement, and is likely to suffer a Company Material Adverse Effect (as that term is defined in the Merger Agreement).”
And with that, the acquisition of Twitter by Tesla billionaire Elon Musk, in equal parts panned and anticipated, is officially off-again.
“While Section 6.4 of the Merger Agreement requires Twitter to provide Mr. Musk and his advisors all data and information that Mr. Musk requests ‘for any reasonable business purpose related to the consummation of the transaction,’ Twitter has not complied with its contractural obligations,” is likely to be the death knell of the blockbuster deal, at least in the near future.
Musk and Twitter, it seems, remain at the same impasse they were two months ago: Musk wants to buy Twitter, but is concerned Twitter’s user base contains more fake accounts than the social media giant is willing to admit; Twitter swears less than 5% of its users are fakes. Musk refuses to take Twitter’s word for it; Twitter refuses to let Musk independently verify the data.
Back and forth, back and forth.
It isn’t hard to understand Musk’s position, or Twitter’s either: Money.
If Musk pays too much for Twitter and is left holding the bag when the fake Twitter users are drained out of it, he loses. If Twitter is caught fudging fake user numbers, Twitter board members and stockholders will be left holding the bag when the fake users drain the value out of it. (If there really are less than 5% fake accounts on Twitter, no one loses.)
A similar impasse might result from an attempt to purchase a hotdog stand.
Any prospective buyer of an established hotdog stand would want to know how many customers visit the stand in an average quarter, how many hotdogs are sold, and how much profit they can expect to make in an average year under that existing marquee.
Any bank making a commercial loan for the hotdog stand would expect to know the exact same things.
Purchasers of an existing business are buying more than bricks and mortar, more than liquid and non-liquid assets; any entrepreneur starting a business from scratch can buy all that.
Those who buy someone else’s well-established hotdog stand instead of starting their own are buying “blue sky”. Part of what they are paying for is ephemeral, difficult to quantify.
They are buying a logo, name recognition, the previous owner’s “sweat equity”. They are buying an existing, and presumably loyal, customer base; a reputation for great service, or value, or quality, or innovation or environmentalism or animal welfare and designer ice cream.
They are buying the, “cool factor,” or the, “hotness factor,” for fans of the poet Robert Frost. Both are great and will suffice to push a product up the echelons of consumer desirability.
But how much is a reputation really worth on the open market? How much is a logo worth? Of course, it depends on the logo. The right logo can be worth billions, see Nike.
To estimate how much blue sky promises might be worth in terms of actual future revenue, finance managers, actuaries, tax accountants and their ilk examine past years very carefully. It isn’t a perfect art, by any means.
Big name brands worth millions based on things like “coolness”, name recognition, logos and popularity crash and burn spectacularly all the time- see, Ed Hardy, the Segway, CNN+.
The blue sky promise of an existing business or brand is still seductive to business investors, of course, and Elon Musk is no exception.
He is also no fool, which is why he wants to buy Twitter rather than trying to start a new social media platform from scratch.
Anyone buying a hotdog stand for much more than they might pay to start their own hotdog stand wants to know how many hotdogs they can plan to sell after taking over- and they want to know the truth.
Lying about how many hotdogs are sold in an average year in order to artificially inflate the value of a hotdog stand- intentionally misleading potential buyers and investors with intent to defraud, that is, tricking them into paying more than a company is worth- is a serious financial crime.
Which is why Elon Musk’s accusation is no small one. It involves no small measure of fairly serious fraud, if it is true Twitter hosts more fake accounts than it includes in securities filings.
“For nearly two months, Mr. Musk has sought the data and information necessary to ‘make an independent assessment of the prevalence of fake or spam accounts on Twitter’s platform’,” read the letter from Musk’s attorneys.
“This information is fundamental to Twitter’s business and financial performance and is necessary to consummate the transactions contemplated by the Merger Agreement because it is needed to ensure Twitter’s satisfaction of the conditions to closing, to facilitate Mr. Musk’s financing and financial planning for the transaction, and to engage in transition planning for the business.”
“Twitter has failed or refused to provide this information,” continued the letter, sternly. “Sometimes Twitter has ignored Mr. Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr. Musk incomplete or unusable information.”
It is possible this is just another parry and feint in a dance choreographed by Musk to end in the resolution he still obviously wants.
Twitter might sue to enforce the deal…which might result in an independent audit of Twitter bots anyway.
While corporate media and legacy news outlets were almost universally opposed to the sale- and in some cases, outright furious that a billionaire might control speech on the platform- they are now almost universally furious at Musk for trying to, “Wriggle Out of Twitter Deal.”
The biggest news story in this whole episode of high finance and economic brinksmanship should perhaps be the U.S. media’s complete incuriosity as to how many of Twitter’s users are actually fake.
Why are U.S. media publications so intent on preserving fake Twitter users? One of the changes Musk has proposed to make to the social media platform is verified user identities.
Why wouldn’t we want to verify user identities on the widest and most influential social media network on the planet?
Apart from anything else, unfriendly governments from Russia to Iran to China are conducting Information Warfare campaigns against their adversaries and competitor nations on a constant and ongoing basis. Content farms, troll armies, disinformation campaigns, fake news, propaganda, engineering social unrest, election tampering; these are only a few of the ways Information Warfare is conducted around the world and here at home.
Twitter, whether we like it or not, is a battlefield.
When anyone from local bands to Taylor Swift can pay for more Twitter followers, we can imagine more than 5% of Twitter’s users are probably fake. For further proof, we’ve all noticed the advent of more and more captchas and “I am not a robot” questions.
This increasing prevalence tells us two important things: 1.) Bot accounts are a big problem, on Twitter and everywhere else, or we wouldn’t be constantly answering all these questions about crosswalks and stoplights; and, 2.) whatever tech companies and social media giants are doing to stop bots isn’t really working- otherwise, Twitter wouldn’t need to delete tens of thousands of fake accounts every day.
Let Musk independently verify Twitter bot accounts; if he won’t do it, maybe someone else really should.
(contributing writer, Brooke Bell)