Billionaire Elon Musk is trying to back out of buying Twitter for $44 billion, setting off a high-profile legal battle with the influential social network.
On Friday, Musk lawyer Mike Ringler sent a letter to Twitter saying Musk is ending his agreement to purchase the company. In the letter, Musk alleges that Twitter breached multiple parts of the agreement by failing to provide the billionaire with more information about the number of fake accounts on its site, as well as other data.
Twitter, though, said it still plans to close the deal. “We are committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plan to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery,” the statement said.
In April, Musk offered to purchase Twitter for $54.20 a share, but since then the social network’s stock price has tumbled. At the time, the offered price was a 38% premium to Twitter’s closing stock price on April 1, when the billionaire revealed he owns more than 9% of Twitter. Musk has said before that the deal couldn’t move forward until he got proof that fewer than 5% of Twitter’s 229 million daily users in the first quarter were fake or spam-focused.
Here’s what you need to know about the ongoing saga between Musk and Twitter:
Why is Musk trying to end the deal?
Musk, who leads Tesla and Space X, appears to have concerns about the future of Twitter’s business, even though he said at a TED2022 conference that he didn’t care about the “economics” of buying Twitter.
A letter sent by Musk’s lawyer claims Twitter violated parts of its agreement with Musk, and it outlines information the company allegedly failed to provide the billionaire, including about the social network’s calculations of daily users. Twitter makes most of its money from ad sales, so the number of people who can see ads is an important metric for the company.
“This information is fundamental to Twitter’s business and financial performance and is necessary to consummate the transactions contemplated by the Merger Agreement because it is needed to ensure Twitter’s satisfaction of the conditions to closing, to facilitate Mr. Musk’s financing and financial planning for the transaction, and to engage in transition planning for the business,” the letter said.
Since Musk reached an agreement with Twitter, the company’s stock price has fallen and there are fears about a potential recession. Twitter has fired key executives, frozen hiring and laid off about 30% of its talent acquisition team.
Why did Musk want to buy Twitter in the first place?
Musk is an avid user of the service but also one of its loudest critics.
Musk tweeted a poll to his followers in March that asked whether users believed Twitter was protecting free speech. He said the poll results, in which roughly 70% of 2 million respondents answered “no,” would be “very important.”
“Given that Twitter serves as the de facto public town square, failing to adhere to free speech principles fundamentally undermines democracy. What should be done?” Musk said in a follow-up tweet. Then he made an offer to buy Twitter, noting that he believed Twitter needed to be private to accomplish his goal.
The guarantee of free speech in the US Constitution’s First Amendment applies to the government censoring speech but not to companies such as Twitter, which have their own rules about what isn’t allowed on their sites.
Musk referenced free speech again when Twitter announced the deal in April. He also said he wanted to enhance Twitter with new features and promised he would make the service’s algorithms open source, defeat spam bots and authenticate all humans.
“Twitter has tremendous potential,” Musk wrote. “I look forward to working with the company and the community of users to unlock it.”
Progressives have criticized social media companies for failing to crack down on harmful content such as hate speech and harassment. Conservatives claim their speech is being censored. (Twitter has long denied allegations it censors conservatives.)
On April 19, Musk tweeted that he thinks social media policies “are good if the most extreme 10% on left and right are equally unhappy.” He’s also said he would reverse the ban on former US President Donald Trump who was booted from the platform after the Jan. 6 Capitol Hill riots because of concerns about inciting violence. Trump has said he doesn’t plan to return to Twitter even if the company lifts the ban.
What has Twitter’s response been?
Twitter says it thinks closing the deal is in the best interest of shareholders.
Initially, it seemed like Twitter was going to turn down the offer but the board started to take it more seriously when Musk offered details about how he would finance the deal. The company had adopted a defensive strategy known as the “poison pill” that would make it tougher for Musk to add to his stake in the company. The tactic allowed Twitter to accept a competing offer, if one emerged.
Twitter co-founder Jack Dorsey tweeted on April 15 that “as a public company, twitter has always been ‘for sale.’ that’s the real issue.” Twitter has dealt with leadership changes, layoffs and activist investors as a public company. After Twitter announced the deal, Dorsey said he didn’t believe that anyone should own or run Twitter but taking it back from Wall Street is the “correct first step.”
The idea and service is all that matters to me, and I will do whatever it takes to protect both. Twitter as a company has always been my sole issue and my biggest regret. It has been owned by Wall Street and the ad model. Taking it back from Wall Street is the correct first step.
— jack⚡️ (@jack) April 26, 2022
“Solving for the problem of it being a company however, Elon is the singular solution I trust,” Dorsey tweeted. “I trust his mission to extend the light of consciousness.”
A filing with the US Securities and Exchange Commission also shed more light on how the deal came together. Musk spoke to Twitter co-founder Jack Dorsey in March about the future of social media and decentralizing social media so users get more control over their data and what content they see.
Musk’s effort to acquire Twitter has been a bumpy one. Musk rejected a seat on Twitter’s board before offering to take the company private. Musk also had a conversation with Dorsey in early April in which Dorsey said he thought Twitter, a publicly traded company, would be better off as a private company, the filing shows.
How did Musk plan to pay for Twitter?
Even for Musk, who’s worth about $220 billion, buying Twitter requires some financial juggling.
In an initial SEC filing on April 20, Musk said he had personally committed about $21 billion in equity financing. He also secured about $25.5 billion in debt financing through Morgan Stanley and other financial institutions.
Since then, Musk has raised capital by selling $8.5 billion in Tesla shares, presumably for the deal, and lined up $7.1 billion from outside investors. According to a May 4 filing, those investors include Sequoia Capital and Oracle co-founder Larry Ellison. (Ellison sits on Tesla’s board of directors.) Saudi Arabian investor Prince Alwaleed bin Talal Bin Abdulaziz Alsaud also agreed to pledge his stake of roughly 35 million shares to the deal.
On May 24, Musk pledged more equity to the deal. He’s now willing to put $33.5 billion toward the acquisition.
What happens next?
Twitter says it plans to pursue legal action to enforce its agreement with Musk. Killing the deal could cost Musk $1 billion because of a termination fee that’s part of the agreement, according to an SEC filing on April 25.
The deal also needed to be approved by Twitter shareholders at a special meeting. No date has yet been given for the meeting. Bloomberg reported that the vote would likely take place in late July or early August.
Daniel Ives, an analyst with Wedbush Securities, said in a tweet Friday that Musk’s move is a “disaster scenario for Twitter and its Board as now the company will battle Musk in an elongated court battle to recoup the deal.”
