Elon Musk and Twitter, a Deal Gone Wrong

In this episode, I'm joined by Kirk Michie, founder of Candor Advisors to discuss the unfolding saga of Elon Musk’s failed takeover of Twitter. From April through July 2022: 

• Musk disclosed his ownership of 9.2% of Twitter shares.
• Twitter’s board offered Musk a seat on the board so long as he would not buy more than 14.9% of its shares (a “stand-still agreement”).
• Musk declined to accept the Twitter board seat.
• Musk made an unsolicited offer to Twitter’s board to buy 100% of its stock for $54.20 (or $44 billion).
• Musk tweeted “Love me tender” hinting that he may commence a tender offer to buy shares directly from shareholders. 
• Twitter’s board adopted a “poison pill” rights plan, a mechanism to materially alter a company’s capital structure upon certain events (Musk crossing a threshold of ownership).
• Musk secured debt commitments and equity commitments to fund his acquisition.
• Twitter and Musk executed a merger agreement to cash out the current shareholders at $54.20 and give him 100% ownership.
• Musk and Twitter engaged in due diligence.
• Musk announced the deal was terminated due to Twitter’s failure to deliver data responsive to his due diligence requests, Twitter misrepresented facts (giving him the right to rescind the deal), Twitter is experiencing a “material adverse effect” on its business (allowing him to walk), and Twitter has failed to conduct business in the same fashion to preserve its organization.
• Twitter has promised it will sue to enforce the merger agreement.  
With such a high amount in controversy and a number of “factual” disputes, it seems likely that litigation will persist for a while.

For more than 30 years, Kirk has worked with closely held business owners on their strategic planning, liquidity, and legacy objectives. Kirk advises businesses and owners in the middle-market, those with revenue between $10 million and $500 million.

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Transcript

Speaker 1:

Welcome back to selling your business with David King. I'm David King, and I'm the author of selling your business. Begin with the end in mind, it's available on Amazon. If you haven't subscribed already, please do. And please subscribe to the YouTube channel and give us the highest rating that you can. Um, today I am joined by Kirk Mik. Kirk is with Candra advisors in Southern California. He is an M and a advisor who works with business owners kind of before they get rolling on the process of trying to sell their businesses. Uh, I've gone through Kirk's credentials. This is the fourth time he's been on our show here. So I've, I've laid it out in detail before his immense qualifications. And I won't burden you with that now, but please go back and listen to one of the prior podcasts where Kirk has joined us Kirk. Good morning morning, and thank you for your time.

Speaker 1:

Thanks, David. It's great to be back. So today we're gonna dive into a subject here that is captivated America in the early 2022, the first half of the year, the major mergers in acquisition event. And it's one that went awry. It was Elon Musk's takeover of Twitter, and the deal's gone bad at this point right now. So Kirk and I are gonna try to weave through the events of what happened, the technical aspects of each event, and maybe try to stay away from a lot of the other issues that have gathered the, the news attention and kind of sucked all the air out of the room, because this was an interesting deal. That will be the subject of studies for years to come. So April 4th, let's rewind here. Elon Musk wakes up and realizes that the tooth fair has left 9.2% of Twitter's outstanding common stock under his pillow.

Speaker 1:

So to comply with his legal obligations, he files with the S E C something called a 13 D notice that you're supposed to file when you get over 5% of the outstanding shares of any company, but in any case, he files it then, and it puts the world on notice that he's going to buy, or excuse me, puts the world on notice that he owns 9.2% of the company. Um, there must have already been conversations going on, cuz the same day Twitter's board reaches out to Elon Musk makes an offer to give him a board seat and uh, in exchange for him serving on the board, he would enter into what's called a standstill agreement, agreeing not to acquire more than 14.9% of their outstanding shares. Am I accurate so far there, Kirk?

Speaker 2:

Yeah, you are. He, he, um, he filed a little bit late and there's an S E C investigation into that, but let's say that, that, you know, kind of goes away. He filed as if he were a shareholder, like a hedge fund manager or a mutual fund manager, which is to say he was passive investor. So regardless of whether he'd had any conversations with, um, anybody at Twitter beforehand and it's, um, I think fairly well known that he jacked Dorsey the co-founder of Twitter or friends. Um, so he might have had some sense that he'd be welcome there. Um, it was reasonable and, and probably smart from governance standpoint for the board to, um, offer him a board seat, um, because he had filed as a passive investor. It was a reasonable thing to do

Speaker 1:

And they may have wished that it wasn't about a complete takeover of the company and maybe he was just involved, uh, you know, wanting to get involved in setting their policies, voicing his interests, which those are the things that have made their way through the news. But maybe just this board seat would give him enough of a voice at Twitter that that would satisfy him and wouldn't need to take over Twitter together. Um, within a few days though, April 9th, Elon Musk announce, I don't want the board seat. I want to be free to whatever I want to do in terms of acquiring more shares that correct?

Speaker 2:

Yeah, that's right. And I, you know, I think we can infer from that to some extent that whatever conversation they were having about him getting involved in governance he's I mean, Elon Musk is, uh, I mean he's, he's paid a 20 million S E C fine because he once used Twitter to say that, uh, he was taking, um, Tesla private and he had the funding secured. He didn't. And um, I mean, he's not, he's a guy that sort of, um, his own board has a hard time reigning him in. So it's easy to imagine that he had a conversation with Twitter's board or CEO about what he would do as a board member. And <laugh>, he, he probably didn't like the idea that he had to, you know, kind of go along with other people or collaborate uh mm-hmm <affirmative> skills. Yeah. I mean, it's pretty reasonable to, to, you know, kind of to, to think that that, that conversation didn't go well.

Speaker 1:

Well, I mean, come on E Elon is a, is younger than both of us here. So he's a young buck. That's a young man out there. He's one year younger than me, but, uh, you know, it's hard to control us young guys out there. So moving forward a little bit, he says, I don't want the board seat. And then Twitter takes action on their own here on an on or around April 13th, Twitter's board adopts, what's called a rights plan where every shareholder gets an, an agreement to where they make exercise. Um, it's also known as a poison hill. Um, I, uh, helped companies adopt these back when I worked in Silicon valley. And it's somewhat of a defensive measure for the benefit of the shareholders here, that we're not gonna allow a takeover. That's gonna be in the shareholders' bad interests here around the same time that they adopted this rights plan, Twitter, or excuse me, Elon must tweeted something to the effect of love me tender. And he wasn't just showing his, you know, a ament of Elvis. He was referring to making a tender offer, which is a different type of takeover where you go directly to the shareholders, you set a price and you buy up shares directly in the open market.

Speaker 2:

Yeah. Am I

Speaker 1:

Correct in that?

Speaker 2:

Yeah, I think, I think your, your intuition and that of, um, and the inference from other people, um, you know, who followed the deal, um, saw what he was doing there. And, um, I mean, look, there's, <laugh>, there's there's precedent. You gotta go back ways, but, um, you know, around 40 years ago there was a guy named David Murdoch who was a exceptionally wealthy, um, real estate developer in, in Los Angeles, um, an early, you know, member of the Forbes 400 list who was on the board of a company called castle and cook that owned Dole pineapple. And he didn't like the way they were running the company. He was supposed to be, you know, he was a shareholder and he was supposed to be a collaborative board member. And they didn't like, um, what he thought about the way they were running the company.

Speaker 2:

They voted him off the board. And, um, you know, about 15 minutes later in, uh, in, you know, corporate years, um, he launched the tender offer to buy the company, you know, in a sense you don't like my ideas and you're not gonna run the board the way I wanna run it, I'll buy you. Right. Which is, I mean, Musk is the wealthiest man on the planet and arguably is good at doing certain things. He's a great product creator and let's remember Twitter's a product. And so, and, and it's never been very commercially successful as a business he was offering. Well, he, it's never been that successful as a business. Um, you know, in terms of profitability. So, you know, who knows maybe he had some great ideas for how to make it a better company.

Speaker 1:

When I helped companies adopt poison pills, uh, around, you know, 2000, 2001, most of these companies are a lot of them, the reason they were doing so is because they had more cash in the bank than their total market capitalization. So you got more cash in the bank. We're sitting here, we got, you know, a billion dollars in the bank, but our total outstanding shares may only be worth 700 million. So these were purely defensive measures here that were also in the shareholder's best interest. We don't want somebody to come in and buy us here and then get all that cash we're worth, you know, more than our net assets here. Um, with regards to this particular poison pill and their, you know, clear indication that what they really wanted, um, was to prevent the takeover by Elon Musk. Do you think that if they had gone the distance and that was the thing that prevented Musk from, from taking over the company and no matter how high he raised his offer, could they have run into some fiduciary problems with their shareholders? If some shareholder brought a suit and said, look, we could have gotten a lot more for this, but you just didn't want Elon Musk to be the one that take us over.

Speaker 2:

Sure. I think, um, you know, part of the reason that this is, um, so compelling and, and part of the reason that it's gotten, um, you know, so much press attention is one Musk is the richest man in the world. And he's sort of like the, you know, the Tony stark or iron man of our times, right? And so he's a, he's colorful figure. He now has nine children by several different women. Um, you know, he's get like, he's, he's a compelling figure. And the other thing too, to remember is that, um, like human beings run companies, um, you know, uh, CEO might work for the board of directors, but, um, you know, boards, in some cases you'd want 'em to be, um, even handed and practice pure governance without emotion involved, and you'd want the CEO to do what's best for the company, but there could easily be a viewpoint that we're not letting that guy take this business and do what he wants. Right. Yeah. So, yeah. I mean, look, it, it's maybe a little bit of both, right? Yeah.

Speaker 1:

And actually I get my dates just slightly off there. April 13th is the date that Elon Musk sent his letter to the board saying, this is the offer I wanna make, I wanna acquire all the shares for cash 54, 20 per share, $44 billion valuation. And it was on April 15th after they had this offer in hand that they adopted the rights plan. Mm-hmm <affirmative> um, so you think that $44 billion valuation might be kind of stratospheric?

Speaker 2:

Um, I, I do. And you know, I'm part of that is that like, look, I mean, the company was worth between 25 and 30 billion in terms of market cap before he made the offer. So he, you know, he does this clever nod towards, um, cannabis with it being 54, 24, 20 being, you know, kind of the celebrating. So, you know, um, he does that. So that's the, you know, very, very kind of on brand with Musk and then offering, um, you know, 44 billion for a company that, that, um, in, in the best and most generous possible accounting makes close to a billion dollars a year of transferable economics for EBITDA. Yeah. So he was offering 44 times EBIDA, um, to put that in perspective, um, you know, solid businesses sold in the private markets, you know, trade eight to 12 times EBITDA, um, in a frosty M and a environment. So 44 times, um, you know, that's, I mean, that's a hell of evaluation. The, the, the board quite frankly, you know, um, should have just said, if you've got the financing and you can do the deal, right. Um, you know, it's a fantastic offer

Speaker 1:

And that was the issue. If you've got the financing. So Twitter, uh, or rather Musk comes through with commitment letters, showing that he's got the financing to back, it both some debt financing and some equity financing. And this letter is still sitting there. His is sitting there as a proposal to Twitter's board. So we fast forward and on April 27th of Twitter, their management and Elon Musk execute a merger agreement. Um, and the merger agreement, you know, it sounds like the effect of the deal was all the shareholders today, get cash at this price, your merging with what, you know, a merger is company, a merges with company B and the two become company, a company B just goes away. So in this case here envision this, you're having a garage sale and there's one big, valuable treasure chest in the middle of your garage. And you in a bunch of neighbors own it together, Elon Musk grabs or drives his pickup truck into your backyard, or rather into your driveway.

Speaker 1:

He's got a crate inside the back of his truck inside that crate. There's another box saved just a trunk wooden trunk and all around that wooden trunk there's, uh, cash, billions of cash. So then the lawyers come out, okay, wave the wand. And the Twitter treasure chest turns into the plain one that Elon Musk has in the back of his truck, but then all that cash winds up in the hands of your neighbors and everybody is happy. Elon closes his crate drives away. And now, instead of all that cash, he's now got Twitter, but that is the basically that is how a reverse triangular merger works. I'll, I'm not sure I'll get offers from any high level business in the schools to teach that, but that's, that's the, anyway, that's my explanation for it. Is it, it, it was a reverse triangular merger. Anything you would add to that in terms of the deal terms or the way to look at that deal.

Speaker 2:

Yeah. So I look, I think, um, you broke down a complicated thing. Um, well, it's a tricky thing to kind of understand, and there had to be legal reasons that they made the offer that way. And didn't just do a traditional letter of intent to buy the company with combination of cash and, and structure, right? So there had to be some reason that it was done that way and, you know, look, the board did what, um, what they should have done under the circumstances, which was to say, if you want the asset that bad, um, we're gonna accept the agreement, but we're gonna put some, some, um, hooks into the agreement because, you know, um, not for nothing Elon, but we've been watching you kind of flip around from flower to flower for a while, and it's not clear that you follow through on things you say you're gonna do so here's what's gonna happen.

Speaker 2:

Right. And they, they, you know, essentially start to turn this thing into a definitive agreement, right? At the outset before diligence is done, there's a billion dollar breakup fee in the thing. And, um, they're, you know, forcing him to remove financing contingency very quickly because the thing is, you know, whether, you know, Musk is worth, uh, a hundred billion or a half a trillion, the reality is, you know, he's probably got, you know, access to 50 million of cash. And then the rest of it is Tesla SpaceX and, you know, other shares. So he is gonna have to lever those shares. He didn't have that kind of cash, right. And even if he uses all of his leverage capability, he's still gonna have to come up with a bunch more equities. So, you know, getting financing done at that point is not a layup, even for the richest man in the world. Cause it's 44 billion is just a truckload of, right.

Speaker 1:

So now we've got a merger agreement and it's been several months now, deals don't close the next day. As you're mentioning there's financing, there's due diligence, there's all the, they've gotta get the shareholders to approve this thing. Twitter does, he's going through now and claiming that he's not getting what he needs to complete his due diligence, claiming that Twitter is in breach and saying, he's got a right to walk away. Is that a fair assessment of, and in addition to some other allegations, he's throwing out,

Speaker 2:

It's a fair assessment of what he's saying. Um, which is a bit disingenuous when you're like, look, um, due diligence, um, is a deep dive into the company, but you know, it's a public company. So, um, you know, the information is out there in 10 Ks and 10 QS and annual reports. Um, and you know, they've got a big four accounting firm doing their financials. And so sure he had more access than, than the, the public markets do. But if, if, if you decide you're gonna walk away from a deal, that's got the kind of, uh, repercussions of walking away that this one does. You definitely have to come up with some stuff to say, these are kind of extraordinary things that in the course of due diligence, I found that caused me to be able to walk away from this deal. Right. And so that's what he's done,

Speaker 1:

Right? And he's making more of a, of a claim that he's not getting the information that he needs to make the determination about the spam and the bots, the fake accounts that are on, uh, Twitter's platform. And the I've got a Tempe of the, the merger agreement, the boring part here he's making the merger agreement, allows him reasonable, a access to all information concerning the business, the properties and person.

Speaker 1:

One, okay. A little technical hiccup there, but the editors will be able to brush that up real quick. So getting back to what we were talking about, the agreement itself. So basically the terms of this agreement for a re reverse triangular merger are essentially the same as what Elon proposed in his initial April 13th letter, correct? The last best and final.

Speaker 2:

Yeah. Um, you know, he <laugh>, he kind of bought it like you're buying a, a used car. Um, it was, you know, uh, like the, the verbiage was sort of as is, but there were certainly due diligence provisions and all the other stuff that you would expect to be in there, but sort of like, um, I'm not gonna negotiate any higher, um, you know, that, that, or at least that's how I would interpret last best offer. Yeah. And look, it was a, it was a, you know, 30 to 40% premium to where this stock was trading before he announced that he was accumulating stock. So it's a pretty good offer.

Speaker 1:

Right? Well, ha having worked in Silicon valley and, and worked with companies in the, the normal world, um, it is fantasy land in terms of whether there's any business metrics, any sort of fundamentals that will support the stock price. Um, you, you, what do financials mean? You know, all these companies went public before they ever had a profit. And the whole idea is just, this is the new thing. And we'll see what happens with it. Fair, fair assessment.

Speaker 2:

Yeah, it is. I mean, fundamentals don't matter at all until all of a sudden they do. Right. Um, <laugh>, you know, and, and, you know, look that that starts to happen when you have, uh, correction, like we've been having, so not incidental here is the fact that, you know, he's pulled out.

Speaker 1:

Yeah.

Speaker 2:

You know, the markets are down a lot, right. Mm-hmm <affirmative> Soly. The valuations would be lower. Certainly, you know, Tesla is 50% off of its highs. So that was part of his financing source. So they're, they're some pretty meaningfully changed dynamics regardless of, of what the intent was to start with.

Speaker 1:

Right? So the market has shifted a lot. Um, the, the due diligence and the type of deals that we often see, the things that the buyer is looking at and can kill a deal when they find some is, is the accounting. They look through the numbers, wait a minute here, how are you recognizing revenue? Are you accruing all your expenses? Do you properly account for this and that once the buyer finds anything to kind of kill their confidence in the numbers, that's when you got a lot of work to hold a deal together in this case, it, it, it's not about the accounting. It's about the accounts. It's about how many of these are spam accounts. How many are bots, uh, and how many of these are real users on Twitter? And that's, that's the information that he's been trying to pull out of them.

Speaker 1:

And there's something called the fire hose that supposedly has all this data that, that they've been sharing with him from time to time, but that's anyway, April 27th, they sign this agreement. And recently July 8th, he sends a letter saying it's off and gives a long list of reasons why he's terminating the agreement. And the primary reason he gives is that he can't get the information that he needs through the due diligence process. Um, and just reading the agreement. And now Twitter has responded by saying, no, we're gonna Sue you. We're gonna hold you to this deal. We've got a specific performance clause. We're gonna make you biased. And you're gonna like, because you, we have not breached this agreement. They, the tough thing here. And you and I both do deals, but being a lawyer, I've seen a fair amount of litigation and a litigator could look at a sandwich and find a way that one side of the sandwich could Sue the other.

Speaker 1:

You can always invent litigation. And the longer that the issues, you know, take to prove, um, the, the more value that there is in getting the case over with, um, this is a case when there's this much money at stake, I don't see how it's resolved short of a trial on the facts here. Um, because what we've really got is a factual dispute, um, must, will claim under the agreement. He's reti entitled to get all information about the business as he may reasonably request. So reasonable lawyers love that word of reasonable, you know, and then Twitter can refuse to give him information that in the reasonable judgment of the company would cause significant competitive harm to the company. If the deal doesn't go through, so then you've then reasonable and reasonable. You're gonna have a lot of facts. It's gonna take a lot of vetting. This is not a case that will res resolve quickly. It's not an issue of law. It's an issue of fact. Um, what do people think right now in terms of the, the prospects for how they think this thing will end up? What is the market

Speaker 2:

Well? So Twitter stocks down. So the market believes that this deal's not gonna happen, or at least the ARBs are selling their positions. The people that be between when an announcement's made and, um, you know, then sell out their position when the deal goes through. So it sure looks from a sentiment standpoint, like the market believes steel's not gonna happen. And I think there's a lot to unpack here, but one of the things is if was still wants the asset, he would be acting very much the same way, sort of like I'm so aggrieved that I didn't get what I was asking for. And what I found is concerning to me. And therefore I need to back away from the deal. Look, if you wanna get the Twitter board, um, to be willing to renegotiate, which they're saying they won't. Yeah. Um, then you have to come up with some reasons, right?

Speaker 2:

And this is the, you know, I know you and I have talked about my, my, you know, kind of Axiom of buyers, their full-time predators and sellers. Part-time prey. That's the case here too. I mean, look, Twitter's never been a really, really well run business, but it's always been a really fantastic platform. So the idea that they could sell it for 44 billion and try and compel specific performance, in other words, force him to go through with the deal on terms that no longer makes sense in the marketplace. Um, that would seem like trying to litigate against the wealthiest person in the world, right. Long odds against it. And Twitter would run outta money before Musk would, right? Yes. However, if Musk still wants the asset, his behavior might not be any different. Maybe he just wants to make sure that he pays 40 or 50% less than in his initial offer.

Speaker 2:

And the only way to get the Twitter board to comply is, um, you know, to go through this exercise and maybe the only way Twitter's board can exercise their fiduciary responsibility to shareholders is to fight him tooth and nail to keep the mm-hmm <affirmative> the way it is. So both sides might be a little bit like before they could just come to the table and negotiate a new deal. Both sides might have to do what they're doing to ultimately get to a resolution, cuz if he still wants to buy the company, um, then the board's gotta continue to negotiate in good faith to maximize the value to the shareholder. Right. And they won't be able to argue that with the market and especially tech stocks down 30 to as much as like 70% with companies like Netflix and others, that this wouldn't be a good deal at 28 billion.

Speaker 2:

Right. That would, that would still be basically where the company was when he made his initial offer in, before the market turned back. Mm-hmm <affirmative> it could still happen and even compelling into specific performance. You know, know, I would say that the, the, the metaphor for Musk's way of operating in the world is that, you know, he's a guy that doesn't stop at stop signs because he thinks he's smarter than the people that design the streets. And so, you know, he like, even if a judge in the Delaware Chancery court compels specific performance, Musk could say, what are you gonna do? Put me in jail if I don't buy the company and that's not gonna happen. Right. So if, if he's bluffing or if he's serious about the bots or the governance or not getting the information, it would look the same right now. Mm-hmm <affirmative>

Speaker 1:

Yeah. Now, one thing that's different about this deal from the deals in the middle market that we typically see is a buyer. It's not a good idea to take the company. You're gonna buy, put it out in the middle of the street and hit it with a sledge hammer and told brains are all over. That that is not what you wanna do with a company. You wanna buy, kill its reputation, demoralize the employees just beat it to a pull. Um, it's not what most buyers do in most situations here. You've got a different dynamic where you've got a market price. And like you're saying here, there's the, how the, the market is gonna impact the choices everyone makes the other bit, I would say, as a, as a, as an attorney, there is enough money at stake here, and the parties are far enough apart. I would say that there's gonna be a full, protected bit of litigation there. There's not, you know, you and I have a dispute over $10,000 of gambling debt. You owe me. And, and finally we just say, look, you know, it's not worth getting lawyers involved. We're just not, this one is, is the complete polar opposite of it. There's enough money at stake here that they would gladly pay attorneys Feess to Sue this thing until they see how it's likely to come out.

Speaker 2:

Karen. Absolutely. David, everyone involved has good reason to take this thing to the map, go as far as it needs to go, if you are Musk, um, and you don't wanna own the asset at $44 billion, um, you know, forget the billion dollar breakup fee mm-hmm <affirmative>. Um, because you've also got shareholder lawsuits that have already been filed and those that will be filed if he doesn't go through with it, you've got an SCC investigation. You've got a lot more than a billion dollar for its exposure. If you're the Twitter board, um, you're gonna Sue Elon Musk for everything between 44 billion on where the share price is right now and say billion dollars out the window. You have irreparably harmed this company. Um, and so, um, you know, either specific performance or financial remuneration, um, you know, in proportion to the harm you've done. Um, and I think, I think you're spot on, I think that, that that's, what's gonna happen here. And I think with certainty that matter how long it takes, Musk's either gonna own Twitter or be a lot less wealthy at the end of it. Yeah. No matter what his, you know, kind of power and resources

Speaker 1:

Are. Yeah. Well, I mean, it's kind of a, it might be kind of a no win situation here, uh, that both of them are gonna spend a lot what's gonna happen to Twitter is all of this evidence is vetted in court. I mean, I'm sure that there's much as possible. They're gonna try to submit things under seal, but I mean, you're gonna hear a lot of information and you know about the, the fake accounts on Twitter and a lot of other information that'll be damaging to its reputation. This is there's gonna be some harm to both sides here. You don't go through 15 rounds without taking some shots. Um, when Musk gave his letter saying, I'm out, it's terminated. I it's over. Okay. It's when you're gonna have litigation with someone, it's the opposite of having an argument with your spouse. If you're gonna have an argument with your spouse, just pick your battles, pick one thing to talk about, okay, here, he's laying out everything, because if you're gonna go into litigation, you gotta raise these issues or you'll lose them.

Speaker 1:

So he's number one, trying to build the record that I've always cared about, all these problems. And two, when he goes into the lawsuit, it looks like a little bit of a shotgun, but if you don't shoot that shotgun, then you're, you're only left with, with one of the, with the allegations. So in, in this case here, um, he's claiming that they haven't satisfied their obligations under the due diligence. They're not giving him all the information that he needs to see this information, this data about their accounts. Um, and as I said here, with the reasonable on both sides, it's just not gonna be an issue that's quickly disposed of the other issues are far tougher for Musk to, to make his day to prevail. He's, he's claiming that the representations that, that Twitter made misrepresentations to him about the company in inducing him to do this deal.

Speaker 1:

If, if you, if someone he lies to you to get you to buy a bar of gold tells you it's gold, but it's really, it's bronze. Okay. You can just undo that deal altogether, get your money back, give them their bar of gold. You, you hear he's claiming there were misrepresentations about the deal deal, and he's got the extreme right of reci. I wouldn't be any money on that one. They, he is also alleging, um, a material adverse effect that is ongoing and continuing here. So, you know, Twitter's obviously been shaken up by all of this turmoil. Um, it's kind of hard to go shake up somebody's cage and then saying, I'm not gonna buy what's inside this cage because I've shaken up the cage. I mean, do you, do you think I've got a good read on that one?

Speaker 2:

I think you do. I think, um, uh, well <laugh> to quote the imminent philosopher and business strategist, Eddie Murphy, who in an old standup routine used to say, um, you know, if you're in a bar and you think you're about to get in the fight and you're pretty sure you can win, throw the first punch. And if you don't think you can win, throw a bunch of dirt up in the air and act crazy. And, um, I think, I think Musk is taking the second strategy, um, because his Bluss are notwithstanding, he's not sure he can win here. So he's really trying to mitigate, um, how much money he's gonna be out at the end of the day here mm-hmm <affirmative>, uh, the material adverse thing is pretty unlikely to prevail, correct? Given that Twitter is a public company, he, he might be able to argue that bots were 10% and not 5%, but that's not material or adverse because I think most of his to use Twitter figure, I hell I thought, you know, bots were probably 40%.

Speaker 2:

So I don't, I, I think that that won't fly and there's very, you know, I don't wanna veer into your lane, but there's very little precedent for getting that fly. Yeah. So from a diligence standpoint, um, the thing he's up against is with the public company to argue that, um, they didn't give you everything you needed. You can make the argument on the other side of that, that is public company and therefore everything you needed was already public. You have a public accounting firm evaluating their financials. They have a public accounting firm reporting their financials so that, you know, that one goes against him. And then the other piece is that he's arguing that because key executives are leaving and because they're going into a hiring freeze and doing some layoffs that that's changed things. Well, five key employees out of 7,500 total employees have left the company in the last week.

Speaker 2:

Um, arguably at least two and maybe all five left because they thought Elon Musk was gonna be their new boss. Mm-hmm <affirmative>. So I would argue that he's the material adverse effect there. Yeah. And then he announced, um, that he was gonna do layoffs at Tesla, his own company. Right. So he can hardly say that Twitter is running their company badly for going into a higher and freezing layoffs. Yeah. When his public filings on his own company or that he's doing some of that same thing. Right. Yeah. So true. I think he loses most of these arguments, but again, he's throwing up dirt in the air and acting crazy in the, in the hope that that will cause the board to say, well, listen, we don't have a billion dollars. Um, mm-hmm, <affirmative>, you know, to fight with this guy. So let's try and get to a solution. Yeah. But you, again were spot on in saying that we're probably in for some protracted, you know, machinations behind the scenes here.

Speaker 1:

Yeah. That one, the kind of the last one that he's allowed, these people, you know, there have been resignations and he's not been replacing people. You know, he is not hiring that. Um, they've failed to continue to operate the business in the same fashion as it out was operating before that one is generally okay. I thought I was gonna buy Twitter and instead I, I show up to buy it and you're, you're making cars, you know, you've completely changed the business model here, or you've, you've moved into another state. Something is dramatically different about it. The material adverse aspect argument is the wheels just came off of this thing in, you know, whether whose fault it was, the, the, the company is no longer doing well. And I should be able to walk away. Both of those are flimsy. They, the argument that he's, you know, subject to misrepresentations, I think he has a very tough time meeting that burden.

Speaker 1:

However, I think that the, the one that's gonna be protracted is this one, where did they satisfy all their obligations and due diligence? Or did they not, did Twitter satisfy the obligations? Were all of his requests reasonable and, or did Twitter reasonably think that disclosure of this information to Musk would cause them a competitive disadvantage? That's the one, not only is it a closer call it's where Twitter doesn't want to go down this path and have these types of things disclosed. Um, I think we are gonna see this thing go into a fairly lengthy battle here.

Speaker 2:

I, I agree with you. I think the, um, on, on the piece about what Twitter does or doesn't want exposed. Um, I mean, first of all, I would say again that while Twitter has had, uh, uh, a high market cap, it's never been a well run business. So arguing that you started to dig in and found out that it's not a well run business, I could send you 50 articles about how badly Twitters run mm-hmm <affirmative> over the last 10 years. Um, that's not new information. The idea that, um, instead of 840, uh, you know, million in, in EBITDA, they have 620, um, because of, you know, how you report different things. I mean, that won't be revelatory. It has never been a well run business in a financial sense. And the other thing too, is that they went through a really public governance fight to get to the current CEO.

Speaker 2:

Um, you know, arguably the fact that he works full-time in Jack Dorsey didn't, um, you know, makes him a better CEO than Jack Dorsey, cuz at least he shows up for work. Right. Mm-hmm <affirmative> and, and, and Musk has a little bit of a problem there too, because in his, um, you know, in his offer, he said he was gonna act as the CEO. So that's a third company that he's going to be the not full time CEO. Yeah. Himself, he, most of, most of his arguments won't pass the test of what he does or doesn't disclose on his side, you know? So the, the he, but, um, it's, you know, if he's got so much money, so much ability to, um, you know, if this is protracted lasts longer than anybody else that, you know, arguably it won't be the best use of Twitter's corporate resources, um, to be in five years long litigation and spend, you know, a year worth of their EBITDA on suing right. Of the world who can outlast them. Right. Yeah.

Speaker 1:

A lot of the things that we were saying there just going over would be normal metrics of an ordinary business, the management, the turnover, the audited financials, all these things, except again, Twitter and Facebook, the other social media platforms, this is fantasy land. So what gives them the value, the value is the fantasy, you know? And so then we're getting into things. What sort of disclosures did he want and, and what is he gonna, you know, what's he gonna face more resistance from putter about their algorithms, the data, the bots, all that sort of stuff, stuff that's beyond my pay grade to understand those sorts of things. But I think that's, that's gonna be the sticking issue here, not a whole lot about turnover or who's gonna run the company or what their, their financials look like.

Speaker 2:

Right. But, but there too, David, you know, the, um, so that, that ephemeral nature of what makes them valuable when it's not the fundamentals mm-hmm <affirmative>, this is where he might have some additional exposure because yeah. Harms them from a sentiment standpoint. Mm-hmm <affirmative> and the, the measure of the harm is what happens to the, the stock mm-hmm <affirmative>, you know, as he Asay the company. Yeah.

Speaker 1:

Um,

Speaker 2:

You know, that, that could cause Twitter to fall a lot mm-hmm <affirmative> and then you've got more shareholder lawsuits, and then you've got the company, um, with an even stronger argument that he's irreparably harmed them. And, um, so I think he's, you know, look Musk is okay with dangerous games, but he's playing a pretty dangerous game here. And I think that, um, that I, the only way this makes sense to me from an M and a standpoint is if, if I'm advising him on buying the company, and this is one of the reasons that I never advise buyers only sellers. Cause you know, I represent the people who need the extra information and, and yeah, aren't used to doing this every day, but if I were advising him, mm-hmm <affirmative> um, I would say, look, if you're willing to spend a billion dollars in litigation in order to pay 20 billion less to complete this transaction, then the ROI on that's pretty strong go for it. Mm-hmm <affirmative> if you really wanna back away from this thing, what you wanna do, um, is be careful about whether you do any further damage to this, this company, this platform, right? So tamp down your whole, uh, disingenuous first and genu first, uh, amendment argument and tamp down your whole, you know, they should put Trump back on and tamp down your it's all bots and all that stuff because you might hurt the platform more and you don't want to be on the hook for that. That'd be my guidance.

Speaker 1:

And the one thing we can predict from Elon Musk is his unpredictability. So we're gonna go today and see three things that surprise you, but <laugh>, so this is, this is an unfortunate turn of events. We, we like to see deals come together successfully and everybody get wealthier and have win-win situations. And this one is gonna be a win largely for litigators. Um, and, and it's just, it's, it's counterproductive for the market, I would say. Yeah. Um, public transactions transactions where the, a public company is the target have had kind of a bad run here for a pretty good while now. And you may, you're gonna be able to correct me as to the success stories. Um, I mean, I'm thinking bank all the way until what I think it was probably the worst public public merger ever that AOL time Warner merger. Um, and then in the, you know, about fast forward seven, eight years with the federal reserve pointing guns at the heads of all the major financial institutions, we had all those, you know, shotgun marriages at Delta where the big banks acquired investment banks, um, public activity out there, either a takeover of a public company of a big one like this, or, or public public mergers.

Speaker 1:

And, and in my career, I've only worked on a handful of public, public mergers. They're just the exception, um, successes that we've seen in the past couple of years that give hope for people that, you know, these sorts of deals can work.

Speaker 2:

Yeah. Well, you're right about the idea that they're, you know, you, you can't list that many of them off. And part of that is that, you know, we've been in a largely up stock market for a number of years. And so, um, the ability for one public company with a whole bunch of MBAs, and maybe even some PhDs buying another public company, that's got a bunch of MBAs and maybe PhDs and, you know, you know, getting more out of it, um, with synergies, um, you know, which, you know, kind of rarely happens, especially when you have to pay up for it because you've got, you know, private equity firms on the sidelines with the trillion dollars of dry powder. And every time a public company tries to buy another public company, you've got a private equity firm, um, that can in some cases outbid them, um, and has just as much ability to finance the deal.

Speaker 2:

So generally they'll overpay. So none of those are turning out to be fantastic success stories. And I think your ride AOL time Warner turned out to be, um, you know, kind of fool's goal. The other thing that happened back then is that, you know, you think about the idea that when Peter teal was co-signing, um, you know, Elise and putting like a half a million dollars into Facebook to get a me material amount of ownership, Rupert Murdoch was buying MySpace, the number one social media platform for 585 million at that time, that's worth nothing. It's been written off to zero. Yeah. Um, you know, on the other hand, um, I think if you were to ask Brian Monahan at, uh, bank of America, whether he's glad that, um, that, that, you know, the, the, the Merrill Lynch fed pushed Merrill Lynch into a shotgun wedding with them, I mean, they've made a ton on Merrill Lynch.

Speaker 2:

Yeah. You know, it didn't work out so well for, um, Jamie diamond to have to buy, um, bear Stearns. On the other hand, you know, arguably some of those things saved the financial markets. I mean, there was a period there where if the financial markets had to been a TV network, um, we were pretty close to going dark there for a period of time. So those, but you're, you're, you're, um, you're right. There just, aren't a whole lot of, um, buyouts of public companies that have turned out to be fantastic things. And having said that, I'm sure we will, we will induce a lot of trolls to find a few data points that make wires into both of us. Yeah. Uh, but generally speaking, um, you know, private companies getting sold to public companies has made more sense because private companies, you know, have been trading for kind of 8, 10, 12 times in a buyout boom.

Speaker 2:

And the public companies that are buying them are trading at 18 to 40 times. And so, you know, if you take 10 million of EBITDA from a company that trades at 10, right. It's a hundred million company into a, a, a, a, a public company that trades it 30 times move that EBITDA in you now have 300 million worth of market cap. You paid a hundred million for the company. There's a 2 million lift here. You got founders that got a hundred million and get to retire. That's a win-win for both sides. Right. Um, so it that's just been a better dynamic. Um, yeah. You know,

Speaker 1:

Well, Kirk, the good news for both of us is this is early in the morning and everything else we work on today should be a little more straightforward than Elon Musks. <laugh> after takeover of Twitter, just go home today, knowing that you're a champion that you didn't screw up, anything as bad as Elon Musk.

Speaker 2:

Thank you. That, that with the bar set sufficiently low, David, I will, uh, I'll be confident. I can clear that today. Thank you. Wonderful.

Speaker 1:

Yeah. Yeah. Well, it's great to see you as always Kirk, you're the best guest here, and we love having you and thanks to everybody for joining us on selling your business with David King. And we will see you next time.