Miscellany Central
Saturday, July 9, 2022
Elon Musk Does Not Care About Spam Bots / Matt Levine
What you need to know: Elon Musk Is Buying Twitter. What’s Next and What Does It Mean?
Elon Musk Does Not Care About Spam Bots / Matt Levine
Also the merger proxy and Allianz Structured Alpha.
By Matt Levin
18 May 2022 at 01:52 GMT+9
Programming note: Money Stuff will be off tomorrow, back on Thursday. Unless. You know.
Oh Elon
Elon Musk is the richest person in the world, and an active Twitter user. When he tweets, he gets a lot of spammy replies, many of which seem to be written by automated bots. He has complained about this a lot. Eventually he decided to do something about it. The thing that he decided to do about it was buy Twitter. On April 13, he sent a letter to Twitter Inc.’s board of directors offering to buy the company for $54.20 per share in cash. “If our twitter bid succeeds,” he tweeted, “we will defeat the spam bots or die trying!”
His Twitter bid succeeded. On April 25, Twitter and Musk issued a joint press release announcing that he had agreed to buy Twitter for $54.20 per share. The press release included a quote from Musk promising to “make Twitter better” by, among other things, “defeating the spam bots.” He was really mad at the spam bots! He wanted to buy Twitter because of the spam bots.
Yesterday he announced that he does not want to buy Twitter because of the spam bots:
Elon Musk declared he won’t proceed with his $44 billion takeover of Twitter Inc. unless the social media giant can prove bots make up fewer than 5% of its users, casting yet more uncertainty over the deal.
The billionaire tweeted “this deal cannot move forward” unless Twitter provides proof of its claims, reiterating his own view that the ratio is far higher. …
Twitter said it is “committed to completing the transaction on the agreed price and terms as promptly as practicable,” in a statement on Tuesday. …
The battle over bots has become a sticking point for Musk, who told a tech conference in Miami on Monday that fake users make up at least 20% of all Twitter accounts, possibly as high as 90%. Twitter regularly states in its quarterly results that the average of false or spam accounts “represented fewer than 5% of our monthly daily active users during the quarter,” adding that it applied “significant judgment” to its estimate, and the true number could be higher.
I think it is important to be clear here that Musk is lying. The spam bots are not why he is backing away from the deal, as you can tell from the fact that the spam bots are why he did the deal. He has produced no evidence at all that Twitter’s estimates are wrong, and certainly not that they are materially wrong or made in bad faith. (Musk can only get out of the deal if Twitter's filings are wrong in a way that would cause a “material adverse effect” on Twitter, which is vanishingly unlikely.) His own supposed methodology for counting spam bots is laughable. Yesterday Twitter’s chief executive officer, Parag Agrawal, tweeted a thread explaining in general terms how Twitter estimates that fake accounts represent fewer than 5% of its count of active users, and how this analysis can’t be easily replicated by outsiders (because they don’t know which accounts are real, and also because they don’t know which accounts Twitter counts as daily active users). It seems clear that Agrawal’s thoughtful answer is basically correct. 1 Musk responded with a poop emoji.
More important, nothing has changed about the bot problem since Musk signed the merger agreement. Twitter has published the same qualified estimate — that fewer than 5% of monetizable accounts are fake — for the last eight years. Musk knew those estimates, and declined to do any nonpublic due diligence before signing the merger agreement. He knew about the spam bot problem before signing the merger agreement, as we know because he talked about it constantly, including while announcing the merger agreement. If he didn’t want to buy Twitter because there are spam bots, he should not have signed a contract to buy Twitter. No new information has come to light about spam bots in the last three weeks.
What has happened in the last three weeks? Well, the prices of tech stocks have gone down, making the $54.20 price that Musk agreed to look a bit rich. (Snap Inc., a social-media competitor to Twitter, is down more than 30% since Musk made his offer on April 13.) And the price of Tesla Inc. stock, which he is relying on to finance part of the purchase price, has also gone down, making him poorer and making the $54.20 price look even more expensive. (Tesla is down almost 30% since he made his offer.) So he is angling to reprice the deal for straightforward market reasons. But that is very clearly not allowed by the merger agreement that he signed: Public-company merger agreements allocate broad market risk to the buyer, and he can’t get out just because stocks went down.
So he is pretending that he wants to reprice the deal for other reasons. He is not pretending very hard — the poop emoji is not going to hold up in court! — but he’s doing enough to confuse the public and give his fans a pretext to believe that he is really the victim here.
Poor Twitter. After Musk announced that he had taken a 9% stake in Twitter, but before he offered to buy the company, he signed a standstill agreement under which he would join Twitter’s board of directors and promise not to buy more than 14.9% of the stock. Four days later he tore up that agreement; then he made his bid. I wrote at the time:
This is an awkward situation for Twitter's board. They can’t really accept Musk's offer. For one thing the price is embarrassingly low; again, Twitter traded above the offer price last October. For another thing, the financing seems to be made up of cobwebs and phlogiston. But also Musk has joked about taking companies private before, and he generally changes his mind a lot. (He agreed to join Twitter’s board last week! And then changed his mind four days later!) If you are a well-advised professional public company board, it is just catastrophic to imagine that you might say “okay Elon $54.20 it is” and then he’d say “ha no I was kidding, psych!” That would be crippling for a public company. Also that is basically what he did to Twitter’s board last weekend!
Well, nobody listens to me, and here we are. Twitter accepted Musk’s offer, and three weeks later, he said “ha no I was kidding, psych!” And it is catastrophic.
What can Twitter do about it? Certainly they can walk Musk through their methodology and give him evidence that spam accounts represent fewer than 5% of monetizable daily active users, but what good will that do? He doesn’t care, he’s lying about this, and no evidence that they can give him will have any effect. Twitter could get all 229 million of its monetizable daily active users in a room and have them say “hello Elon, we are real,” and that would not convince him, because he does not want to be convinced. He wants to pay a lower price.
Or Twitter can do what he actually wants, which is renegotiate the deal at a lower price. But what good will that do? What does Twitter get from signing a new merger agreement with him at, say, $42 per share? 2 He has not lived up to any of his agreements with Twitter — the standstill, the non-disparagement clause of the merger agreement, apparently a nondisclosure agreement, the merger agreement itself — and he’s not going to live up to a repriced merger agreement unless he feels like it. An agreement with Elon Musk is worthless, as Twitter has learned over and over again.
Or Twitter can try to hold him to the terms of his current deal, but that is also risky. The way the merger agreement works is that Musk’s damages are capped at a $1 billion reverse termination fee: If he walks away and Twitter sues for damages, it can’t get more than $1 billion, or about $1.30 per share, which is nowhere close to enough to compensate for losing this deal.
The agreement does, however, allow Twitter to sue for “specific performance,” meaning that it can go to a Delaware court and ask a judge to order Musk to close the deal (and fund his $27.5 billion equity commitment). But this is tough and there is no guarantee it will work. Specific performance is only possible if Musk’s debt financing is available, which seems likely but not certain, 3 and if a judge is willing to order it. On the one hand, Musk’s lawlessness and bad faith will probably annoy a judge and make her more likely to specifically enforce the merger agreement. On the other hand, Musk’s lawlessness and bad faith might worry a Delaware judge and make her less likely to specifically enforce the merger agreement. 4 It is bad, for the rule of law generally and for confidence in Delaware corporate law in particular, if Musk blatantly ignores a merger agreement and a judge lets him get away with it. But it’s even worse if a court orders him to close and he ignores the order. Musk has a history of ignoring court orders and getting away with it.
Or, as I said yesterday, the fairest consequence for all of this might be for Twitter to kick him off Twitter (they run Twitter! they can do that!), but I bet they won’t.
I don't know what will happen here. Twitter has no good options. The market thinks that the most likely outcome is that the deal gets done at a lower price, rewarding Musk for his bad faith.
One weird point is that, while Musk has tweeted about not going ahead with the deal, and talked about it at a private conference for his fans, it doesn’t seem like he has sent any formal notice to Twitter saying that the deal is off. (Certainly neither Musk nor Twitter have made any SEC filings about that sort of notice, which you might expect if he'd sent one.) Perhaps his lawyers are less willing to ignore the agreement than he is, or at least need a better pretext than he's managed so far.
So arguably Twitter’s best option is to do nothing: Let Musk tweet, ignore him, and continue acting as though everything is normal and the deal is going to close. Don’t give him any more pretexts to walk away, just keep trying to get regulatory and shareholder approvals, and then come to him ready to close and see how serious he is about all of this. The basic problem with Musk, for Twitter, is that he changes his mind a lot. Maybe he'll change it again.
The merger proxy
In that vein, this morning Twitter calmly filed the preliminary proxy statement for its deal with Musk, a key step toward getting shareholder approval. In general, the most interesting part of a merger proxy is the “Background of the Merger” section, which describes in detail how the deal was negotiated and what the board of directors was thinking, and that is true here.
One fun thing to do with this proxy is to go through it and count how many times Musk violated US securities laws in his efforts to buy Twitter. For instance:
Also on March 26, 2022, Mr. Musk contacted Egon Durban, one of Twitter’s directors, to set up a discussion between Mr. Musk and Mr. Durban. Mr. Musk and Mr. Durban subsequently spoke on March 26, 2022 and March 27, 2022 and discussed the potential of Mr. Musk joining the Twitter Board, as well as the fact that Mr. Musk had purchased a significant stake of more than five percent of our common stock. …
On March 27, 2022, Messrs. Musk, [the chairman of Twitter’s board of directors, Bret] Taylor and [Twitter Chief Executive Officer Parag] Agrawal discussed Mr. Musk’s interest in Twitter and potentially joining the Twitter Board. As part of that discussion, Mr. Musk stated that he was considering various options with respect to his ownership, including potentially joining the Twitter Board, seeking to take Twitter private or starting a competitor to Twitter.
Musk started buying Twitter stock in late January, and crossed over 5% on March 14. Under the securities laws, he had 10 days — until March 24 — to disclose this fact publicly. In fact he waited until April 4, disclosing his stake 11 days late. During this period — when he was legally required to disclose his Twitter stake, but had not — he (1) kept buying more stock and (2) had discussions with Twitter’s board of directors about taking over the company. That seems like it would have been material information, for the people who were selling him the stock!
Then, when he finally did disclose his stake on April 4, he did it on a form (Schedule 13G) that is limited to passive investors, checking a box indicating that he had “not acquired the securities with any purpose, or with the effect, of changing or influencing the control of the issuer.” Again, he was already in discussions about taking over Twitter or joining its board. He was very much not eligible to use Schedule 13G, and by using 13G — and representing he had no plans to influence the company’s control — he was lying to the US Securities and Exchange Commission and the market.
Then Musk negotiated a board seat and standstill with Twitter, which was made public; he filed a Schedule 13D, belatedly but accurately indicating that he was going to be an active investor. The 13D said that, while he was keeping his options open, he had “no present plans or intentions” to take Twitter private. A few days later he decided to scrap the standstill agreement and buy Twitter instead; again from the merger proxy’s background section:
On April 9, 2022, before Mr. Musk’s appointment to the Twitter Board became effective, Mr. Musk notified Messrs. Taylor and Agrawal that he would not be joining the Twitter Board and would be making an offer to take Twitter private. Mr. Agrawal informed the members of the Twitter Board of Mr. Musk’s communication.
That was a Saturday; that Monday, Musk filed an amended Schedule 13D announcing that he was not joining the board. This 13D said that he “might engage in discussions with the Board” about “potential business combinations,” but neglected to mention that he had already told Twitter he would be making an offer.
I don’t know; it all seems bad. The SEC is supposedly “investigating” Musk’s disclosure failures in this deal, and I suppose these admissions will help with the investigation, but what can they do about it? Fine him? He's so rich. Prevent him from buying Twitter? That’s what he wants! Ban him from running a public company? That is probably more drastic than the SEC (or a judge) could stomach, and will just lead to another annoying effort to take Tesla private.
Anyway the merger proxy also does give some insight into Twitter's board deliberations. For one thing, the board called big Twitter shareholders and seems to have gotten a pretty clear message of “just take the deal”:
Over the subsequent four days [after April 17], Messrs. Taylor and [Twitter director Patrick] Pichette held meetings with a number of Twitter’s largest institutional stockholders to discuss the perspectives of these stockholders on Mr. Musk’s acquisition proposal and Twitter more generally. As part of these meetings, these Twitter stockholders generally (1) expressed that Twitter has much opportunity, but indicated a perceived failure of historical execution; (2) expressed understanding there has been recent management change and openness to a stand-alone plan to give them confidence in the long term; and (3) encouraged the Twitter Board to seriously consider Mr. Musk’s proposal and weigh the risks of future execution.
The board also heard from its financial advisers that $54.20 was pretty good. (In hindsight, tech stocks fell after they signed the deal, and it looks even better.) The proxy summarizes the fairness opinions of Twitter's advisers at Goldman Sachs Group Inc. and JPMorgan Chase & Co., which included, for instance, discounted cash flow valuations of $36.50 (the bottom of JPMorgan’s range) to $60.90 (the top of Goldman’s). The proxy also includes Twitter’s management financial projections for the next few years, which included growing revenue from $5.9 billion in 2022 to $12.9 billion in 2027, and growing unlevered free cash flow from $561 million to $3.7 billion. (Musk’s own pitch to co-investors in his Twitter buyout projected revenue of $26.4 billion and free cash flow of $9.4 billion by 2028, so I guess he is more ambitious.)
The board did not contact other potential buyers, on the theory that (1) “Mr. Musk’s acquisition proposal had been publicly disclosed (and the subject of significant press coverage),” so if anyone else wanted to buy Twitter they would know to call Twitter, (2) there probably weren’t any other realistic buyers and (3) trying to find another buyer might scare off Musk. Given the shareholder feedback (to take the deal), the analyses of Twitter's financial advisers (that $54.20 was a pretty good price), and “the recent general decline in trading prices of social media companies,” the board figured that $54.20 was the best they were going to do, so they tried to pin down the deal with Musk.
In doing this they were — or at least, the merger proxy now says they were — properly focused on making sure that Musk was actually committed to closing the deal:
Throughout the remainder of April 24, 2022, and into April 25, 2022, Twitter, Parent and Mr. Musk and their respective legal advisors negotiated the terms of the merger agreement and related transaction documents. Key terms negotiated between the parties included (1) Twitter’s specific enforcement rights to require Parent and Mr. Musk to perform their obligations under the merger agreement and consummate the closing on the terms set forth in the merger agreement, as well as third-party beneficiary rights under the equity commitment letter to enforce Mr. Musk’s obligations to fund the equity commitment; (2) the circumstances in which a termination fee would be payable by Parent and Mr. Musk and the amount of the termination fee; (3) the availability of potential monetary damages under the merger agreement; (4) the terms and conditions applicable to Parent’s and Mr. Musk’s obligations to obtain regulatory approvals, and the closing conditions related to regulatory approvals; (5) the terms and conditions applicable to Parent’s and Mr. Musk’s obligations to complete debt financing arrangements for the acquisition, and Twitter’s obligations to assist Parent and Mr. Musk in such efforts; …
In the section titled “Reasons for the Merger,” the proxy adds that one reason the board agreed to the deal is:
Reasonable Likelihood of Consummation. The belief of the Twitter Board that an acquisition by Mr. Musk has a reasonable likelihood of closing. In that regard, the Twitter Board considered Mr. Musk’s business reputation and financial resources, as well as those of Parent’s debt financing sources, which the Twitter Board believed increased the likelihood that the required debt and equity financing for the merger would be available.
Well. When they announced the deal, I pointed out that Musk’s “business reputation” was in fact that he is perhaps the only billionaire chief executive officer of a US public company who has ever offered to take a public company private as a joke. I wrote:
Musk has some history here: In 2018 he pretended that he was going to take Tesla Inc. private; he wasn’t, and eventually he settled fraud charges with the U.S. Securities and Exchange Commission. Ordinarily if a billionaire chief executive officer of a public company offers to buy a company, the odds that he is kidding are quite low. When it’s Elon Musk, the historical odds are, like, 50/50. (He really bought SolarCity.)
Nobody listens to me. Now the historical odds are 1 in 3!
Tony Lee at 3:27 PM
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