Discover more from Yet Another Value Blog
Some updated $TWTR thoughts
Yesterday, I posted our open letter to the Twitter board. Today, I wanted to follow up on that letter with some lingering thoughts I couldn’t fit in the letter and some answers to some questions or feedback I’ve gotten on the heels of the letter.
First, I’ve listened to a lot of stuff on the Twitter suit. I think this podcast is the best one I’ve heard; obviously I might be biased since the professor generally agrees with my take! To be balanced, here’s a WSJ article arguing that TWTR’s case is a loser. Obviously I disagree; I think it’s an embarrassingly bad take (a large part of it hinges on the argument that Musk breaking the contract harms twitter shareholders, not twitter itself, so Musk can get off free, which is pretty bonkers), but I’ll highlight it to be balanced.
Second, I believe a lot of investing is pattern recognition. As I was reading Twitter’s complaint against Elon, I was struck by how familiar the feeling I got reading it was to the AT&T / Time Warner case against the DOJ. A bit of a simplistic summary: the DOJ sued to block AT&T’s acquisition of Time Warner. Many (including myself) thought the DOJ did not have a real antitrust reason to bring the suit; instead, it seemed the DOJ was suing because then President Donald Trump did not like CNN (which is owned by Time Warner). The market was pricing the lawsuit like AT&T had a 50% chance of winning in court (a colleague noted that the DOJ had historically won ~2/3 of their antitrust cases, and leaned towards pricing this case at that base rate). Every time I read the court filings, I’d think to myself “T’s case is an absolute slam dunk; the only way I lose here is if there’s some smoking gun secret filing the government has shown the judge.”
Sure enough, when the judge ruled on the case, there was no smoking gun. T handily won the case, and the merger closed shortly after.
I’m reminded of that case when reading Twitter’s complaint against Musk. If you assume TWTR’s downside in a break is $20 and the upside is the deal price ($54.20), Twitter’s current stock price of ~$37 is pricing in ~50/50 chances of TWTR winning. We’ve yet to see Musk’s response to the Twitter case, but based on the facts as I’ve seen from the outside and as alleged in the court case, I think it’s crazy to think the case is a coin flip. In T’s case, there was the question of a “smoking gun”; does the DOJ have some expert witness or secret filing the proves there’s a big anti-trust issue here? With TWTR, the odds of a smoking gun are much lower; Elon would need to have some secret filing that shows Twitter has been defrauding the public, investors, etc. for years. In addition, in T / TWX, the market was leaning towards the base rate of “the DOJ generally wins antitrust cases;” here, the base rate should be “sellers generally win MAE cases or settle for a token cut”, but the market is pricing this much more aggressively / pessimistically for TWTR.
Twitter is overwhelmingly likely to win (based on my read of the case!); the only question is if Musk will get off on some technicality where a judge doesn’t want to order specific performance (I’ll discuss this risk later).
Third, a lot of Musk’s fame / reputation have come from free “earned media” that he gets from trolling. He reminds me of Donald Trump in that regard: they’re both willing to wade into any controversy and cross some line that most other businessmen / politicians / people aren’t willing to cross. That strategy doesn’t work for the vast majority of people (they don’t have the charisma or shamelessness to pull it off), but for people with the charisma and talent to pull it off (like Musk and Trump) it works fabulously. I’ve generally found that type of strategy works really well outside of the courts, but inside of the courts it’s an absolute detriment because there’s so much paper trail to hang you with your own words. And I think Twitter’s complaint against Elon really highlights just how much Elon has harmed his own case here. For every argument Elon makes in trying to break this contract, Twitter can point to an Elon tweet that shows he’s lying or arguing in bad faith. In fact, not only did Elon harm his own case in all his tweeting; he actively broke the merger contract, which I think will tilt the odds further against him in court and lends credence that specific performance needs to be the remedy here.
Speaking of Musk / Trump, I’ve generally found both of them to be pretty impulsive. Often that works for them (the bird in hand is often worth way more than two in the bush, and if you’re impulsive you’ll take the bird in hand and often Musk / Trump have the charisma to trade the bird in hand for three in the bush later), but in this case I think it really comes back to hurt Musk. Musk was so desperate to acquire Twitter that he agreed to basically all the terms they set in the merger agreement (thus a “seller friendly” contract), and now that iron clad merger agreement has him locked into the deal. And Musk was so impulsive to get out of the merger agreement that he did so almost as soon as he could attempt to; tactically, it seems like it would have been better to wait till the last possible minute (i.e. right before the merger was set to close) to break and hope something went wrong on Twitter’s end that would have given him a better chance of getting out of the deal (though at this point the SEC review is his only hope as all other closing conditions have been met. Still, Elon could have hoped the SEC failed to approve the proxy, or Twitter forgot to renew their website license and the whole service went down, or something else crazy happened). Or, better yet, he could have kept quiet and hoped that the banks pulled their funding and gave him an out.
Speaking of bank funding, probably the best argument I’ve heard from bears on why this deal won’t close is that the banks will pull and Elon will walk. If Elon had not constantly disparaged Twitter, that option might be in play (though I think it was a remote possibility). At this point, I don’t think financing is in play. You cannot nuke your own financing and then point to a lack of financing as a reason to get out of the deal; Kohlberg tried that in the DecoPac case and the court easily ruled against them. Between Musk’s tweets and how little he appears to have tried with getting the debt funding (despite what he’s committed to do in the contract), I think Twitter will have an easy case that Elon nuked his own funding if the banks did try to pull (See ~p. 46 of the filing for more). Take it to the most extreme: could Elon go on Twitter and say “I’ve seen Twitter’s finances and they are on the verge of bankruptcy; no lender in their right mind would lend them money” and then break the merger when lenders refused to fund? Of course not…. but that’s basically what he’s done here if he tries to argue a financing out.
And speaking of DecoPac, the judge who ruled there is now the Chancellor and will be the judge on the TWTR / Elon case. My buddy compound (who is an absolute must follow for all things Twitter) highlighted her DecoPac ruling in this tweet, and I provided a deeper highlights in this thread; I have a feeling she will not look kindly on the shenanigans Elon is pulling here (you can see the full decision here; difficult to read it and think Twitter isn’t in a great spot. It’s particularly of note that the judge clearly can understand complicated legal / financial minutia and the back and forth in a typical sales process; that’s not going to look great for Elon. She also clearly understands buyer’s remorse (she uses the term on p. 31 of the ruling). The line that will prove mana to arbs ears is “Chalking up a victory for deal certainty, this post-trial decision resolves all issues in favor of the seller and orders the buyers to close on the purchase agreement,” but you should really read the whole thing. Particularly interesting is that Kohlberg (the buyer) rejects pandemic exclusion from the MAE (meaning the seller assumes that risk), but the judge still doesn’t let them off the hook. Also on p. 35 she dismisses a model from Kohlberg based on “personal hunches”; good luck with that bot argument Elon!).
One of the biggest risk cases I’ve heard from people is “yeah, the law is against Elon. But Elon is so rich/famous he’s above the law. And, even if Twitter wins, a judge is going to hesitate to enforce specific performance because they are worried about what would happen if Elon just doesn’t abide by the ruling.” This isn’t just arm chair arbs saying they’re worried about that; CNBC had a former Delaware Supreme Court Justice come on and say exactly that.
I think that’s nonsense. If Twitter wins specific performance, and Elon loses his appeal, he is going to specifically perform.
Just play out what happens if a judge says “specific performance” and Elon tries not to. First, what lawyers are going to work with him anymore? I’m sure someone will take his money, but (as my partner Chris said) he’s going to have to start hiring mall lawyers, because none of the top tier firms are going to work with someone who is in open defiance of Delaware. Their whole legal practice is based on Delaware courts functioning; to have one of the richest men in the world in open defiance of the Delaware court system threatens to bring their whole profession down. Second, if Elon tries to ignore a Delaware ruling, he’s going to quickly find himself a pariah. What bank is going to lend to him? Who is going to do business with him? You might say “plenty of people will; he’s the richest man in the world!” But I think you’d be wrong; every person who does business with him will need to factor in that he might decide he doesn’t want to pay them and stiff them and then ignore a court ruling to pay. Sure, maybe that doesn’t matter for small contracts (I’m sure Elon will get people to paint his house and the like), but for multi-billion dollar deals? Forget about it. Too much tail risk. I’d note that something similar happened with Donald Trump; many firms simply refused to do business with him because he had such a habit of not paying bills or filing for bankruptcy (and this is before he became a politician / President)… and Trump simply took things to the limits of the ethical line or stretched the interpretation of the law. As far as I know, he never openly defied a court order. Elon would be made an instant pariah if he lost on appeal and then didn’t fulfill his obligations.
Ignoring those extremes, courts have plenty of recourse to enforce a judgement. Elon has plenty of liquid assets (mainly his Tesla stock); the courts can start slapping liens on that stock, bar him from ever serving as an officer of a Delaware company, etc. I’m not sure the exact mechanism, but if Elon tries to defy a judgment there are plenty of creative ways to force him to comply.
In fact, I think the Delaware court would be eager to think of creative ways to enforce a specific performance agreement. Delaware court is a serious place, and they’ve built their whole reputation on being the place to go to for corporate and contract law. I think a judge is going to look at the facts of this case, and in ruling against Elon and making sure that specific performance is enforced see a way to show all parties that no one is above Delaware law / contracts still matter.
I had a few people ask me about damages. On the low end of damages, the most frequent question I get is “why can’t Elon just walk away for $1B in damages.” Read the Twitter complaint; Elon has brazenly broken the contract and Twitter deserves specific performance. The $1B termination number was for a bunch of break scenarios that are simply not in play; Elon openly skirted the contract.
But, on the higher end, my letter to the board mentioned that damages to Twitter should be in excess of $20B if there was a monetary settlement, and I had a few people push back that that was way too high.
Again, I disagree. It’s tough to calculate a standalone share price for TWTR; I’ve been using ~$20/share. That’s >$25B below TWTR’s value at $54.20/share.
However, in a monetary settlement, Twitter could and should argue that Elon has materially lowered Twitter’s standalone business value. For no reason other than his “gut”, Elon has constantly disparaged Twitter. He’s suggested they’ve lied to investors and asked for an SEC investigation. Doing so has impacted morale, created a massive headache, and proven a huge time suck for management. Even ignoring the market’s move down, Twitter’s standalone value today is unquestionably lower than it was a few months ago because of Elon’s antics. Any monetary settlement needs to account both for Elon’s ridiculous attempts to walk away from the deal and the damage he’s inflicted to Twitter on a standalone basis.
Somewhat related, one area that is underplayed in TWTR’s suit but that I think will prove powerful in court: when Elon first approached Twitter, he said he was considering building a competitor. Then he entered a deal to buy Twitter and harassed them for more and more information until he had access to basically all of Twitter’s data, had destroyed the employees’ morale, and had huge swaths of the organization spending all of their time meeting his data requests. If you throw your galaxy brain hat on, you could argue this whole thing was a way for Elon to create a huge distraction / headache for Twitter, destroy their business franchise, and then use the distraction to launch a Twitter competitor. Do I think that’s what Elon did? No, I don’t think he’s strategic enough for that and I think he simply has buyer’s remorse. But Twitter can argue he could potentially do that, and if Delaware let’s Elon out of this contract it creates a dangerous precedent that chills future M&A as buyers could enter deals to buy companies, glean all the trade secrets they possibly can under guise of trying to close, and then use the Musk / Twitter precedent to back out of the merger for a song. In order to counter that, future sellers would need to dramatically reduce the information they give buyers, which would chill M&A and make it much more costly / expensive.
Anyway, these are just some top of mind thoughts on the heels of the letter we sent and the response we’ve gotten. I remain extremely confident in Twitter’s case here; if we go to court, it’s tough to see how Twitter loses.
I’m looking forward to seeing Elon’s response to the Twitter suit in the near future, and will likely have some updated thoughts then.