Elon Musk is formally trying to end his bid to buy Twitter. After hinting heavily that he no longer wanted the company in tweets attacking Twitter over its bot calculations and an ominous story in The Washington Post this week reflecting his thinking, Musk’s legal team is taking steps to terminate his $44 billion deal to buy Twitter.
“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,” Musk’s lawyers wrote in a letter to Twitter’s Chief Legal Officer Vijaya Gadde.
Musk points to his unsubstantiated claims that Twitter is misleading investors and users about the number of fake accounts on its platform, which the company has long estimated to be under 5%. Musk had no apparent qualms with Twitter’s bot count prior to inking the deal and actually mentioned that he planned to take on the platform’s spam problem as the company’s new owner.
It’s widely assumed that Musk wants out because markets took a dive shortly after the terms of the deal were agreed upon, taking a solid chunk of his Tesla billions over the cliff too. The electric vehicle maker’s shares halved between April and late May and haven’t recovered since. By mid-May Twitter’s own stock price had plunged to less than $40 a share — a considerable discount on the $54.20 per share Musk agreed to in late April .
Nonetheless, Musk’s argument is essentially that Twitter misrepresented its monetizable daily active user counts and in doing so broke the terms of the deal:
Twitter is in breach of the Merger Agreement because the Merger Agreement appears to contain materially inaccurate representations. Specifically, in the Merger Agreement, Twitter represented that no documents that Twitter filed with the U.S. Securities and Exchange Commission since January 1, 2022, included any “untrue statement of a material fact” (Section 4.6(a)). Twitter has repeatedly made statements in such filings regarding the portion of its mDAUs that are false or spam, including statements that: “We have performed an internal review of a sample of accounts and estimate that the average of false or spam accounts during the first quarter of 2022 represented fewer than 5% of our mDAU during the quarter,” and “After we determine an account is spam, malicious automation, or fake, we stop counting it in our mDAU, or other related metrics.” Mr. Musk relied on this representation in the Merger Agreement (and Twitter’s numerous public statements regarding false and spam accounts in its publicly filed SEC documents) when agreeing to enter into the Merger Agreement. Mr. Musk has the right to seek rescission of the Merger Agreement in the event these material representations are determined to be false.
Musk’s legal team goes on to claim that Twitter hasn’t given him sufficient access to its data to conduct his own analysis, though it’s not clear how that analysis would differ from Twitter’s own longstanding methods. The letter also states that Twitter told Musk in an unreported phone call that the company includes suspended accounts in its monetizable daily active user numbers and points to this as proof of his accusations that the company’s counts aren’t above board.
… Twitter’s disclosure that it ceases to count fake or spam users in its mDAU when it determines that those users are fake appears to be false. Instead, we understand, based on Twitter’s representations during a June 30, 2022 call with us, that Twitter includes accounts that have been suspended — and thus are known to be fake or spam — in its quarterly mDAU count even when it is aware that the suspended accounts were included in mDAU for that quarter.
Bret Taylor, the chairman of Twitter’s board of directors, responded to Musk’s letter Friday by doubling down on the company’s intentions to see the deal through. “The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement,” Taylor wrote. Twitter CEO Parag Agrawal retweeted Taylor’s tweet.
Agrawal has previously pushed back on Musk’s accusation that Twitter is undercounting fake accounts, describing the company’s methodology, which generalizes data for the whole platform based on a random sampling of accounts. “We don’t believe that this specific estimation can be performed externally, given the critical need to use both public and private information (which we can’t share),” Agrawal tweeted in May. “Externally, it’s not even possible to know which accounts are counted as mDAUs on any given day.”
It’s far from apparent that Musk’s unsubstantiated criticism of Twitter’s bot counts will be deemed a valid enough reason to terminate the deal, particularly given that Twitter is keen to see it through. For better or worse, we’re going to hear a lot more about that argument in the coming days as Musk and Twitter begin to hash out the messy, months-long ordeal in court.