Elon Musk and Twitter, at a difficult crossroads for both

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An image of Elon Musk next to an illustration with the Twitter logos.
elon musk and twitter, at a difficult crossroads for both

An image of Elon Musk next to an illustration with the Twitter logos.

The purchase of Twitter takes place with a start since last April 26 the board of directors of the social network accepted the sale of the company to Elon Musk for 44,000 million dollars (about 42,000 million euros at current exchange rates). But the latest incident makes it clear that both the billionaire businessman and Twitter are at a difficult crossroads for both and that the outcome of the operation raises more questions than ever.

Last Friday, the founder and CEO of Tesla caused the price of Twitter shares to fall sharply by announcing that he was putting his plan to take over the social network on hold “pending details that support the calculation that the accounts fake/spam really represent less than 5% of users”.

His argument convinced no one. Nor to analysts, who were quick to speculate that the Tesla founder is looking to renegotiate the price and even abandon the acquisition. Nor to investors, since the fall in shares, which were nowhere near the $54.20 offered by Musk, showed that the market is convinced that the tycoon will not complete the purchase. Or at least, he will not do it under the agreed conditions.

It’s true that a number of fake Twitter accounts could affect the social network’s ability to boost its advertising revenue and subscriptions to its paid services, but it was not unknown to Musk when he agreed to the purchase. The social platform has been offering its estimates of the number of fake accounts since 2014, always warning that the number could be higher. Twitter, too, has been facing accusations for years that it isn’t doing enough to address this problem.

So what or what are the real reasons behind Musk’s delaying tactic? especially when his main motivation for the acquisition seemed to be “to promote freedom of expression rather than focus on wealth creation”, as Susannah Streeter, an analyst at Hargreaves Lansdown, points out.

Surely the high purchase price must be one. The figure of 44,000 million is huge, especially after weeks of turmoil that have erased billions from the value of many technology companies, and it may be a strategy to lower the amount you are willing to pay. Also pressured by other investors who will accompany him in the purchase of Twitter.

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Musk could use adverse material change clause to force Twitter to renegotiate, but outcome remains to be seen

But for Enrique Dans, IT professor at IE Business School, Musk’s latest decision has more to do with the fear of Tesla shareholders than with the percentage of false accounts that Twitter may have. As he argues in his blog, Tesla shares, used as collateral for the debt assumed for the acquisition of Twitter, have fallen almost 40% since Musk launched the offer for the social network. And, not only because they have been affected by the downturn in the market as a whole, but also “because they fear the dilution that Musk may have to dedicate himself to managing not only SpaceX and Tesla ( in addition to other smaller projects such as The Boring Company, Neurlink and OpenAI) but now, also, a company like Twitter, with many things to do based on the number of changes that Musk has been insinuating in a short time, “adds the professor .

In the end, what is behind the freezing of the Twitter purchase is Musk’s personal finances. His status as the world’s richest man is tied to his stake in Tesla and he had planned to rely on his shares in this company to help finance the purchase of the social network. The tycoon has already had to sell 8.5 billion dollars in Tesla shares and has provided more titles as collateral.

“If Tesla’s share falls by more than 40%, the conditions that he has signed for the financing of the Twitter operation establish that, with the loss of value of the collateral, Musk would have to pay the entire debt, something that would unbalance even the finances of the richest man in the world”, remarks Dans, who describes what the businessman has done as “common sense”: “Twitter is, without a doubt, a motivating project, one of those that Elon Musk likes, but not as to destroy a good part of what had already been built before”.

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The LVMH and Tiffany case

Advancing whether or not the purchase of Twitter will go ahead in the end is complicated. It would take a crystal ball. But what seems clear is that Musk is going to have a hard time arguing that he has been misled on the issue of fake accounts to break the deal. And perhaps for this reason, it seems that he will also play the Twitter algorithm card to shake the agreement. This weekend, he hinted in a tweet that his feed algorithm was designed to manipulate users, something that Jack Dorsey, founder and former CEO of Twitter, was quick to deny.

The agreed purchases are not so easy to legally suspend and surely the billionaire and the social network will end up in court if they are not able to reach another agreement. Musk could use what is known as the material adverse change clause to force Twitter to renegotiate and accept a lower offer. It is a formula that not many companies manage to pull off, but others like the French luxury company LVMH, which managed to lower the purchase price of Tiffany during the pandemic. It seems that the tycoon will also play the Twitter algorithm card to shake the agreement. This weekend, he hinted in a tweet that Twitter’s feed algorithm was designed to manipulate users (something Twitter founder and former CEO Jack Dorsey denied), and invited the company to bring back the reverse chronological order. .

Clearly, complications come for both parties. The tycoon, who would be forced to pay 1,000 million dollars if he abandons the acquisition, could take advantage of the fact that the Twitter board thinks that it is easier to renegotiate than to litigate (the growth of the social network is still questioned, it has already lost the chance of being bought by The Walt Disney and the drop in tech stocks may not give it a break). But it would not be so easy for Musk to break the agreement and only pay that breakage fee, since the social network could sue him for breach of contract. And win him.

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According to a lawyer specializing in corporate purchases consulted by the FT, the Delaware courts, which rule on most of these agreements, have almost always been cruel to buyers who have sought to walk away from the signed agreements. Also, once Twitter’s board agrees to the purchase, it’s very difficult to get them to accept another lower offer. The aforementioned courts, this medium adds, have rarely allowed this to happen, unless both parties agree to it. Twitter’s board would risk being sued if it agreed to a lower price without serious justification. So the outcome of the Musk-Twitter operation can be resolved soon if there is an agreement – ​​the social network is not interested in getting involved in a costly and prolonged litigation, while it is cutting hiring to save costs – or take a long time to settle if it reaches the courts.

For now, the tycoon has been accused this weekend by the social platform of violating confidentiality agreements. But to Musk He doesn’t seem to be concerned about the reputational damage it would cost him to break the deal with the social network or about his history of being a person who uses Twitter to manipulate the market in his favor. Shares of the social network fell again yesterday by 8.18%, to 37.39 dollars, and those of Tesla almost 5.88% to close at 724.4 dollars.