Why did Musk "flip-flop" on terminating the acquisition of Twitter?

Original Title: 《Why Did Musk "Go Back on His Word"?》

Original Author: Zhou Qi, Cao Zexi, Wall Street Insight

The acquisition of Twitter by Musk, which has been a bumpy negotiation for several months, is now in jeopardy!

On Friday, July 8, Eastern Time, Musk's team terminated the agreement to acquire Twitter, citing serious violations of multiple terms in the agreement by Twitter.

Twitter responded that it would take legal action against Musk to enforce the acquisition deal, stating that it is "confident" of victory. Twitter's stock fell by 9% in after-hours trading on Friday.

According to the previous agreement, Musk would have to pay a $1 billion "breakup fee" if he terminated the deal, so why did Musk want to terminate the acquisition of Twitter? On the other hand, Twitter is unwilling to back down and plans to go to court; what will happen in the future?

Why Did Musk Terminate the Acquisition of Twitter?

Tesla CEO Elon Musk stated on the 8th that he would terminate the acquisition of Twitter, citing serious violations of multiple terms in the agreement by Twitter. Musk claimed that Twitter had not "fulfilled its contractual obligations."

The day before, media outlets had speculated that the deal might be in jeopardy. As mentioned in a previous article, Musk's camp believed that Twitter's spam account data could not be verified, leading to serious difficulties in the acquisition.

One insider said that Musk's team had stopped participating in certain discussions regarding funding for the $44 billion deal.

In recent weeks, negotiations regarding the deal with investors had cooled, as Musk's camp questioned the large amount of data they received from Twitter regarding sales to corporate clients. Insiders indicated that Musk's team's skepticism about the spam data suggested they believed there was insufficient information to assess Twitter's prospects as a business.

Subsequently, Musk stated in a letter to Twitter, written as a regulatory document:

Twitter has not "fulfilled its contractual obligations," failing to provide information on how to assess the prevalence of bots in its social media service.

The information previously provided by Twitter "contained additional conditions, usage restrictions, or other artificial formatting features," making it "of little use."

Twitter has not operated normally, implemented a hiring freeze, fired senior leaders, and experienced other significant departures. The company did not obtain its parent company's consent for changes in its business operations, which constitutes a "material breach" of the merger agreement.

Regarding why Musk terminated the acquisition of Twitter, media commentary suggests that fake accounts were not the only factor leading to Musk's apparent change of heart.

Twitter's stock price has plummeted from a high of $73.34 over the past year to $36.81 at Friday's close, far below Musk's proposed acquisition price of $54.20 per share in May. Analysts believe that seeking a lower price has become Musk's core demand following the sharp decline in Twitter's stock price.

Twitter: See You in Court!

As the saying goes, major affairs in the world must separate after a long time together, and reunite after a long time apart. In the case of Tesla CEO Musk's monumental acquisition of Twitter, this lengthy and bumpy acquisition cannot simply end with Musk's unilateral "happy breakup."

Because Twitter's board member Bret Taylor stated that they had received Musk's intention to terminate the acquisition, but Twitter insisted that it would adhere to its commitments and execute the acquisition deal at the price of $54.20 per share and under the existing agreement terms. Additionally, Twitter plans to take legal action against Musk to enforce the acquisition deal.

It is believed that Twitter will have the upper hand in the Delaware Chancery Court.

Reports indicate that there is a clause in the acquisition agreement that allows Twitter to compel Musk to complete the transaction. This could mean that if the case goes to court, Twitter may be granted permission to force Musk to complete the deal rather than just pay compensation.

The Question Arises: What Happens Next?

So the question arises: with Musk's team wanting to terminate the acquisition agreement and Twitter insisting on going to court, what will happen next?

First, according to the legal agreement previously signed by both parties, if either party interrupts the transaction, they may have to pay the other party a fee of $1 billion. Thus, the party terminating the agreement will need to pay Twitter a $1 billion "breakup fee," but if Musk's side insists that Twitter has not complied with the agreement, the ruling on this fee may go to court.

Second, even if Musk is willing to pay a high price, the "specific performance clause" included in the merger agreement means that as long as Musk still has financing, Twitter can sue him to force him to proceed with the acquisition. However, industry insiders indicate that this could be a "hard-fought battle."

It is worth noting that because Musk waived all rights to renegotiate the deal when he signed the purchase agreement on April 25, his claim that "Twitter has seriously violated multiple provisions of the agreement and made false and misleading statements or caused significant adverse effects" may not hold much advantage. In other words, the court's ruling may result in the judge enforcing the original transaction, a result that could occur after years of litigation; or renegotiating to lower the purchase price.

However, "see you in court" may be a "burden" and "risk" for both parties.

For Twitter, obtaining $54.2 per share for the acquisition without going to court is undoubtedly the most favorable situation it can foresee. After all, since the “poison pill plan”, the performance of Twitter's shareholders and board has leaned towards completing this transaction. Once it goes to court, regardless of the time and effort involved, Twitter's already low morale will further exacerbate its uncertainty, which is not a good omen for its business prospects.

For Musk, it is also a risk. If Musk still wants to acquire Twitter in the future, everything he is doing now is "ruthlessly destructive." Additionally, Musk's reputation and credit will be affected, which may impact his other investment and acquisition matters in the future.

The Bumpy Road of Acquisition

On April 14 of this year, Musk proposed to acquire the social media company Twitter for $43 billion. At that time, Twitter stated that its board would "carefully review the proposal to determine the best course of action that aligns with the interests of the company and all Twitter shareholders."

Previously, Musk had acquired 9.1% of Twitter's shares for $2.64 billion. Before Musk intended to acquire Twitter, he had accepted an invitation to join its board. To counter Musk's acquisition proposal, Twitter's board announced the initiation of a "poison pill plan," allowing shareholders to purchase additional stock in the event of a hostile takeover.

On April 24, multiple media outlets reported that final negotiations were underway within Twitter to accept Musk's acquisition proposal, with expectations of a deal being reached the next day. However, some media warned that the deal could still fall apart at the last minute. On April 25, Twitter's board publicly unanimously accepted the $44 billion acquisition offer.

After acquiring Twitter, Musk reiterated his future plans for the platform, including introducing new features, making the algorithm open-source, reducing spam bots, and verifying all users, and proposed turning Twitter's headquarters in San Francisco into a homeless shelter.

However, after entering May, Musk's camp, which had previously been resolute, began to encounter various "unexpected issues."

On May 13, Musk announced that he would pause the acquisition due to the need to wait for Twitter to provide data confirming that spam and fake accounts accounted for less than 5%, but simultaneously stated that he remained committed to the acquisition. This decision raised concerns in the market about the acquisition and led to a more than 20% drop in Twitter's stock price in pre-market trading.

On May 25, Twitter shareholders launched a class-action lawsuit against Musk, accusing him of violating California corporate law and engaging in market manipulation.

On June 6, Musk sent an email to his lawyers claiming that Twitter had refused to provide user data as requested, which could result in the "termination of the merger agreement." In response, Twitter stated that it would continue to work with Musk to ensure that both parties completed the transaction as agreed.

In late June, the acquisition case took another turn.

According to disclosures from the U.S. Securities and Exchange Commission (SEC) on June 21, Twitter had submitted a proxy statement for a special shareholder meeting. Twitter stated that its board unanimously recommended that shareholders vote to approve the merger agreement with Musk and suggested that shareholders agree to compensate the executives involved in the merger transaction. Additionally, if there were not enough votes to pass the merger agreement at the special meeting, the meeting would be postponed to solicit further advice from other proxies if necessary or appropriate.

On the 24th, Twitter agreed to provide Musk with more data, including real-time API data. Insiders believed that the new data indicated Musk might quickly renegotiate the transaction price, stating that Twitter's value had changed with the new information.

On July 7, media reports cited three insiders saying that the deal was in serious trouble, and Musk's team had stopped participating in certain discussions regarding funding for the $44 billion transaction.