Prospective buyer Elon Musk is trying to get out of the planned deal by claiming that Twitter has a bot problem. But experts say it won’t be that easy
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Tesla billionaire Elon Musk has formally and emphatically renewed his claim that Twitter has a serious bot problem. And he has threatened to back out of his proposed purchase of the company if the social network doesn’t do more to prove its users are real people.
But among experts, it is likely that Musk is only using the bot problem as an excuse to cancel or renegotiate the deal. Because the conditions have been looking better and better for Twitter lately, while at the same time the markets have been plummeting in recent weeks.
In a letter filed with the Securities and Exchange Commission on Monday, Musk said he believes Twitter is violating the agreement by not complying with requests for more information about spam and fake user accounts. Behind the scenes, however, negotiations are progressing, according to people familiar with the matter. The two sides therefore meet regularly and exchange information, said two of the people who were not authorized to speak publicly.
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“What he’s trying to do is leave a paper trail,” said Andrew Freedman, a partner at law firm Olshan Frome Wolosky and an activist investing expert. “His bad luck is that the termination provisions in such acquisition agreements do not provide for the buyer to regret his decision.”
Musk believes 20 percent of users are bots
Last month, Musk said he was putting the deal “on hold” until the social media giant could prove less than 5 percent of its users were bots, the company said in a public report. Musk estimates that at least 20 percent of all users have fake accounts.
However, Twitter says Musk has provided information on how it calculates the number of spam accounts on its service. Executives told employees that since both sides have signed the merger agreement, Musk cannot simply shelve the deal. On Monday, the company reiterated that it would hold Musk accountable for meeting the terms of its proposed $44 billion acquisition. This suggests that those responsible at Twitter also believe he could try to bust the deal.
In a statement, the short message service said it had and will continue to share information with Musk. The company believes the deal is in the best interests of all shareholders and intends to “complete the transaction and enforce the merger agreement at the agreed price and terms.” Twitter could potentially file a lawsuit against Musk to force him to complete the deal should he attempt to back out of the acquisition.
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“Twitter’s board of directors will eventually get fed up and file a lawsuit in Delaware and say, ‘I want a declaratory judgment saying we’re not in breach of the agreement and Musk needs to close the deal,'” said Brian Quinn, M&A director. Professor at Boston College Law School. “That should be Twitter’s next move.”
Twitter shares fell 1.49 percent on Monday, indicating growing skepticism that Musk will complete his $54.20 per share offer and the gap between market expectations and the billionaire’s asking price further enlarged. Since Musk unveiled his takeover plan on April 14, shares have barely — and briefly — climbed above $50. The deal came about at breakneck speed, in part because Musk refrained from auditing Twitter finances beyond what is publicly available information.
Public dispute about bots
Twitter CEO Parag Agrawal clashed with Musk publicly on Twitter over bots. Agrawal said human reviewers would examine “thousands of accounts” to determine the proliferation of bots, but added that he couldn’t be more specific due to privacy concerns. “Unfortunately, we do not believe this specific estimate can be performed from the outside as we must use both public and private information,” Agrawal wrote in May. In Monday’s document, Musk sharply disagreed with that assessment of bots.
“Twitter’s recent offer to simply provide additional details on the company’s testing methods, whether through written material or verbal explanations, is tantamount to denying Mr. Musk’s requests for data,” Musk’s attorney wrote in a letter to Twitter’s top attorney, Vijaya gadde “Twitter’s attempt to portray this differently is merely an attempt to obfuscate and confuse matters. Mr Musk has made it clear that he doesn’t think the company’s lax testing methods are appropriate, so he must conduct his own analysis. The data he requested is necessary for this.”
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Musk believes that the company’s refusal to provide more information constitutes a “clear material breach of Twitter’s obligations under the Merger Agreement, and Mr. Musk reserves all rights arising therefrom, including his right to terminate the transaction.” not to consummate and to terminate the merger agreement.
Filing such an application was not legally required, says Jill Fisch, an economics and law expert at the University of Pennsylvania Carey Law School. “He is using the SEC filing to address the capital markets with this statement.”
A problem for Musk’s argument: he had already publicly complained about Twitter’s bots before making an offer to buy the company.
Penalty: $1 billion each
“He was obviously aware of the issue — he spoke openly about wanting to fix the problem as an area where he could add value,” Freedman says. “He would probably need to demonstrate that Twitter’s actions were reckless or negligent” in order to force the company to renegotiate the contract.
The proposed acquisition stipulates that both parties would have to pay $1 billion each to break the deal — but Musk can’t just walk away by paying the fine. The merger agreement includes a special performance clause that Twitter can use to force Musk to go through with the deal, according to the original filing. That could mean that if the deal goes to court, Twitter could seek an injunction requiring Musk to go ahead with the merger, rather than receiving financial compensation for any violations of the agreement.
Musk’s attorney, Mike Ringler of Skadden, Arps, Slate, Meagher & Flom, said Twitter must cooperate and provide the requested data so Musk can secure the debt financing needed to close the deal. That requirement is also complicated by the fact that numerous financial institutions have issued Musk with debt financing commitments, Quinn said.
As a Twitter user, Musk may have had a different experience of bots on the platform than most other users. Bots are usually programmed to follow popular users to appear more human. Musk, who has 96 million followers, likely attracts a higher percentage of bots than most users.
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Most outside estimates put the share of Twitter bots above the company’s stated five percent threshold. Consultant and bot expert Andrea Stroppa surmises that bot accounts have accounted for about 10 percent of global Twitter audiences over the past nine years.
The proportion increases to as high as 20 percent when it comes to specific topics, such as cryptocurrencies, and to over 30 percent for accounts dealing with specific conspiracy theories, the researcher said.
“There’s a lot of money at stake, so he’d have to have a lot of evidence for Twitter to make it worth giving up instead of fighting for the original prize,” says Ann M. Lipton, professor of business law and entrepreneurship at Tulane University Law School of New Orleans. The whole thing could become an “ugly lawsuit”.
Contributions: Michelle F. Davis, Sarah Frier, Scott Deveau, Chris Dolmetsch, Bob Van Voris and Molly Schuetz
