Quick $TWTR thoughts and the TIF / LVMH parallels
This morning, Elon Musk tweeted his Twitter deal was “temporarily on hold” pending details about fake accounts. The news sent Twitter plummeting to ~$38/share, an enormous spread versus the deal price of $54.20.
I’m still processing the news (it’s been less than two hours!), and I’ve got a little egg on my face here, as I’ve been pretty publicly bullish the Twitter spread, but my initial reaction is that the sell off represents a huge opportunity, so I wanted to throw some thoughts out because I’m seeing some pretty bad takes out there.
First, it has to be said that this isn’t normal. Deals don’t go “temporarily on hold”. A merger is a contract (you can see the Elon / TWTR contract here). You can’t just wake up and decide “meh, let’s pause it while we investigate something.” The contracts clearly lays out the conduct and terms each party needs to abide by. If Elon wants to call the deal off, what he would need to argue is that Twitter’s bot problem is a breach of their “representations and warranties” (often shortened to reps and warranties). In effect, he’d be arguing that TWTR provided him with one set of financials and projections, which he trusted…. but that he then found out a ton of the financials were based on useless “bot accounts.” In that case, TWTR breached their reps and warranties, and Elon could break the deal off pursuant to Section 8.1(d)(i) of the merger (it’s on p. 62 of the contract). In that case, Elon would actually be entitled to a $1B break up fee from TWTR (see section 8.3 for that).
Of course, that’s laughable. In order to argue it’s a breach of reps and warranties, Elon would need to argue he had no prior knowledge of bots on the TWTR platform and/or that the bots were a materially worse problem than he had though originally. Neither are true. Elon clearly knew about spam bot accounts; in fact, one of his first priorities when he floated buying TWTR was cleaning up their bot problem. And TWTR is estimating bot accounts represent less than 5% of mDAUs; even if you thought bot accounts were 0% of mDAUs, having the number be over 0% but under 5% almost certainly wouldn’t be a breach of reps and warranties.
It’s also important to remember that the TWTR deal came together at “breakneck speed” because Elon waived the chance to look at TWTR’s finances beyond what was publicly available. If Elon is claiming TWTR breached their reps and warranties, that is going to be a tough look for him given he waived the right to get private info on them!
The other bad take I’m seeing is that Elon can just pay a $1B termination fee and walk away from TWTR. Again, that’s not how this works. First, if TWTR really breached their reps and warranties, they would owe Elon $1B, not the other way around.
But, second, it seems pretty clear to me under the merger contract that Elon can only get away with paying the $1B parent termination fee if a government agency blocks the merger or his financing for TWTR disappears. Otherwise, TWTR is entitled to specific performance (section 9.9 of the contract); in this case, specific performance would be Elon closing the deal at $54.20/share even though he doesn’t want to.
So, if Elon continues to keep the merger “on hold”, this seems like it would be a pretty open and shut case. Elon would sue Twitter to get out of the contract for breach of reps and warranties; Twitter will sue Elon for breach of contract and specific performance. They’ll go to court, and based on my read of the docs and the law, Twitter would pretty easily win.
In many ways, Elon’s behavior and the potential case remind me of LVMH / TIF from a few years ago. LVMH had a deal to buy TIF, and then COVID struck. LVMH tried to break the deal for breach of reps and warranties; TIF said LVMH had buyers remorse because the environment had gotten so much worse. The facts and contract were on TIF’s side, but LVMH had some advantages in that they were larger and could try to drag the thing on and cause as many headaches for TIF as humanly possible. They ended up cutting the deal price a token amount (from $135 to $131.50) and LVMH saved ~$400m (I mentioned at the time how ridiculous I thought that was).
I think that’s the most likely end game here. The environment had deteriorated since Elon made his bid, and he can make TWTR’s life miserable by dragging this contract out like crazy and making TWTR fight for years in court. Will TWTR win? Probably. But it will take a long time and the company will be in turmoil. I think the most likely end game is we have an acrimonious few months, maybe including Elon trying to fully break the contract and each party launching lawsuits at the other…. but the end game is TWTR takes a small price cut in return for deal certainty.
PS- I’m not a lawyer, nothing on this site is ever investing advice, and I’m writing all of this with ~one hour of analysis. It’s possible I’m misreading something here. But I’ve read the contract several times, and I’ve spent a lot of time looking at situations like this. So feel free to let me know if I’m off on anything here, but I feel pretty good about my take.
PPS- TWTR does have some levers to pull here too. If Elon breaks the contract and tries to get out in court, then I believe all of the co-investor equity capital he sourced could walk. So TWTR could credibly look at Elon and say “go ahead, break the contract. We’ll see you in court, and when we win you’ll have to close the deal but you’ll have to fund and close 100% of it on your own instead of having equity backers take down a huge chunk of it.”