He's going pretty hard on the 5% fake accounts that Twitter reported. I would probably do the same if I were in his position.
[1] From their 2022 10K: We define mDAU as people, organizations, or other accounts who logged in or were otherwise authenticated and accessed Twitter on any given day through twitter.com, Twitter applications that are able to show ads, or paid Twitter products, including subscriptions. Average mDAU for a period represents the number of mDAU on each day of such period divided by the number of days for such period. Changes in mDAU are a measure of changes in the size of our daily logged in or otherwise authenticated active total accounts. To calculate the year-over-year change in mDAU, we subtract the average mDAU for the three month sended in the previous year from the average mDAU for the same three months ended in the current year and divide the result by the average mDAU for the three months ended in the previous year. Additionally, our calculation of mDAU is not based on any standardized industry methodology and is not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our measures of mDAU growth and engagement may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology.
So let's talk about the legal leg to stand on part. From his 13d language (amendment #8, filed June 6th, which is public, but I read it on bloomberg and can't find the link to the gov site this second) it doesn't sound like he has an issue with the definition.
He wants to rerun the numbers and see for himself. He is asking for the underlying data. Twitter pushed back to say that is not in the scope of what was asked for (apparently, based on his letter).
Not taking sides because I was not in the negotiations and know nothing about what each side, indicated, what the legal contract says and so forth. Just saying, the issue is whether they should provide the data for him to run his own calculations.
That's easy to do though - his offer is unconditional. It's like offering a cash amount to buy a house while waiving inspections and all contingencies, but when it comes time to close, insisting your inspector can go into the basement and look at the foundation. You don't have that right, you made an unconditional offer.
The time for 'running his own calculations' was before he made an offer to buy the company. You might think; "Surely you can't expect him to buy a company when he doesn't know how many accounts are bots." Which is a fair point, but that's precisely why people rarely make unconditional outside bids for companies!
He's making a specious argument that the detail is needed to line up his financing, but to continue the homebuying analogy; After offering cash to buy the home without contingency, he's going back to the seller claiming that he's going to take out a personal loan from his friend and that friend wants to know about the state of the foundation but that only your inspector can satisfy him. Really not the sellers problem!
Let's just say I share your intuition about this hypothetical real estate transaction but I am not convinced that it is an appropriate simile. As I read it, his claim is that he didn't waive inspections but relief on the prior inspection report which he is beginning to question.
But whether even that is the right metaphor almost doesnt matter. I think we would have to be steeped in what the standards are in the industry to have a productive discussion.
This is where someone in HN says: I am an M&A lawyer for 30 years and there are four standards. The X v Y standard whereby the effect of the change has to be material but material is not defined, however...
(Matt Levine has, as always, my favorite elucidation)
https://twitter.com/nycsouthpaw/status/1533820324214611969
What Levine is referring to is that the deal is subject to Twitter not making any representations that amount to "material adverse effects" which is a very high standard that Twitter definitely hasn't broached -- but financing statements are often subject to detail that covers "all material respects" which is a much more broad standard that Elon could plausibly litigate.
It's deeply cynical on Elon's part - he knows what he signed and he knows what he got himself into - which is why he's doing this dumb dance to back out now. It might even work, but it's against the spirit and (IMO) the letter of the contract.
He's relying on section 6.4 to make his case that they need to provide him the bot detail - it's short and sweet:
https://www.sec.gov/Archives/edgar/data/1418091/000119312522...
But he's clearly going to use what they provide him to attempt to back out of the deal which is explicitly against the terms of that section.
"material adverse effects which is a very high standard that Twitter definitely has not broached"
I guess my question is how do we know -- from the outside -- that they definitely have not broached it? Elon seems to think the bots issue (roughly, that they miscalculate it) does broach the standard. Everyone I have read thinks seems not to think so and shares your view. But for a naive person on the outside, couldn't it be plausibly argued that this bot thing is a material breach?
I am in the awkward position of not knowing either party. I take each at their word, and the dispute seems pretty "sensible" to me.
The "material adverse effect" standard isn't that the bots would have a materially adverse effect on the deal or transaction, but that they'd have a materially adverse effect on Twitter's profitability for a long duration. Levine laid it out already;
> That is an incredibly high standard: Delaware courts have almost never found an MAE. An MAE has to be something that would “substantially threaten the overall earnings potential of the target in a durationally-significant manner,” the courts have said; there is a rule of thumb that an MAE requires a 40% decrease in long-term profitability. If it turned out that 6% or 20% or 50% of Twitter accounts are bots, that will be embarrassing and might even reduce Twitter’s future advertising revenue, but will it be an MAE? No. “Pending details supporting calculation” is not how this works. This disclosure — that “the average of false or spam accounts ... represented fewer than 5% of” Twitter’s monetizable daily active users — has been in Twitter’s securities filings for many years, always with a caveat that “in making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated.” Musk had the opportunity to read these filings before offering to buy Twitter, and he had the opportunity to do due diligence on these numbers before signing the deal. (He declined.) He can’t now go to Twitter and say “actually now you need to prove that your user numbers are right.” If he wants to walk, he has to prove that they’re wrong, and also that they’re wrong in a way that has a material adverse effect on the business. Which he obviously can’t do.
Advertisers don't really care about how many bots are on Twitter - at least not in the way you might naively expect them to care. Of course they want their ads to be shown to humans, but over a long timeline, it doesn't actually matter what percentage of their views are to humans or bots - only the performance of those ads. If you spend $1 on 100 ads and it leads to $1.25 in sales, you don't really care if it was shown to 95 people and 5 bots, or 90 people and 10 bots, or 50 people and 50 bots. There was a positive ROI for your campaign, so you're going to do another one. You'd prefer it was shown to 100 people and 0 bots, but everyone in the business knows the bot problem is an extremely difficult one to solve, so you just weigh relative performance and adjust the price you're willing to pay while maintaining that ROI.
It's silly for Musk to claim that the deal can't go through because he needs to know how many bots are present to determine potential advertising revenue because he knows how much advertising revenue they have today, regardless of the specific percentage of bots -- if Twitter's wrong about the way they calculate bots, that actually gives the future "bot-free" platform a higher revenue ceiling because then all of the advertisers campaigns would get substantially more performant.
However, I think your pointing out that whatever the bot count is, as long as the ROI is there the advertiser will continue is a good point. It seems obvious now, but I was assuming that the bot count would be a big deal to the advertiser.
You could turn this point into a twitter thread.
"I can solve Twitter's bot problem!"
"Oh wait, they have 10%* bots, not 5% bots? Oohh, that's a bridge too far, too hard."
*Arbitrary number chosen
I insist on buying the house. The owner is reluctant to agree. They delay. I continue to insist that I purchase the house immediately. The owner says, hey let's stop and think about this, let's do due diligence and inspections, let's take our time. I say screw you, there is no due diligence allowed, there is no house inspections allowed, you must accept my offer now. NOW. I insist that the house owner has a legal fiduciary responsibility to their family to sell the house, because my offer is above the assessed public value of the house. This house must be sold to me!
They give in to pressure and accept the sale. I sign all the contracts, I waive all the inspections.
"What, the house has termites? What a surprise! I want my money back."
Elon Musk the Termite master ... I LOLd
It's not like you can go digging around in their databases looking for bot accounts until you have official access.
EDIT: Clearly people feel strongly about this so feel free to look at the comments below for some great answers. I'd ask for you to read before commenting though. I keep getting emails rehashing similar things.
“Temporarily on hold” is not a thing. Elon Musk has signed a binding contract requiring him to buy Twitter. Legions of bankers and lawyers and Twitter employees and special-purpose-vehicle promoters are working to fulfill his legal obligation to get the deal closed. “The parties hereto will use their respective reasonable best efforts to consummate and make effective the transactions contemplated by this Agreement,” says the merger agreement. (Section 6.3(a).) He can’t just put that “on hold.” That contract does not allow Musk to walk away if it turns out that “spam/fake accounts” represent more than 5% of Twitter users. We discussed this last month, when Twitter admitted in a securities filing that it had (slightly) overestimated its daily active users for years. The merger agreement contains a provision that allows Musk to walk away if Twitter’s securities filings are wrong — and this 5% number is in its securities filings — but only if the inaccuracy would have a “Material Adverse Effect” on the company. (See Sections 4.6(a) and 7.2(b).) That is an incredibly high standard: Delaware courts have almost never found an MAE. An MAE has to be something that would “substantially threaten the overall earnings potential of the target in a durationally-significant manner,” the courts have said; there is a rule of thumb that an MAE requires a 40% decrease in long-term profitability. If it turned out that 6% or 20% or 50% of Twitter accounts are bots, that will be embarrassing and might even reduce Twitter’s future advertising revenue, but will it be an MAE? No. “Pending details supporting calculation” is not how this works. This disclosure — that “the average of false or spam accounts ... represented fewer than 5% of” Twitter’s monetizable daily active users — has been in Twitter’s securities filings for many years, always with a caveat that “in making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated.” Musk had the opportunity to read these filings before offering to buy Twitter, and he had the opportunity to do due diligence on these numbers before signing the deal. (He declined.) He can’t now go to Twitter and say “actually now you need to prove that your user numbers are right.” If he wants to walk, he has to prove that they’re wrong, and also that they’re wrong in a way that has a material adverse effect on the business. Which he obviously can’t do.
Now if the board lied, in writing, in a 10K filing, it is a Very Big Deal(tm).
Yes, but you wouldn't put yourself in his position. This is an entirely unforced error on his part.
Lets suppose it is not only 5%.
Maybe 20%.
Would it be fair to buy a company that 20% of its "customers" are fake?
He is forcing twitter to be honest or to at least audit it.
> If our twitter bid succeeds, we will defeat the spam bots or die trying!
> And authenticate all real humans
It's a bit weird to now have him go "I'm backing out on the bid because Twitter has many bots and does not authenticate real humans"
Yes. for a number of reasons.
1) You carry the investigation BEFORE filling to buy (he waived the investigation).
2) Twitter never said 5% are bots, they said 5% of monetasible daily users are bots. Thats a very important distinction, and one Musk is well aware off. Because he has used bots to affect tesla stock price before.
3) No one forced him to put a 40 billion offer on the table, but once its on, it affects the market so you cannot back away willie nilly. Thousands of people made choices based on him filling that offer, he has to deal with the responsability and the consequences.
> He is forcing twitter to be honest or to at least audit it.
No, he is trying to use public sentiment. Like your comment, to not have to pay the 1,000,000,000 fine if he doesn't buy it. And he will have to pay it because he company is now worth much less and he is trying to find a way to weasel away.
But here, I think, he is just trying to get out of the deal.
The high percentage of bots was exactly the reason why he wanted to buy Twitter in the first place. Because removing the bots would have been a relatively straight-forward way of increasing Twitter's valuation. IIRC he even tweeted about it.
[See my clarification below in a comment]
You actually disagree with him, but just the fact that you admire him triggers people.
There's also a possibility he'd just like to ensure the deal closes in a certain later time window. The composition of his personal wealth is complex and highly dependent on his equity holdings which have grown volatile recently.
There's also a possibility he'd just like to ensure the deal closes in a certain later time window. The composition of his personal wealth is complex and highly dependent on his equity holdings which have grown volatile recently.
As much as Elon annoys me, it hard for me to say he does not know what he is doing. Even the WFH tweet was timed seemingly to lower the cost of severance payments from announced 10% workforce reduction.
https://www.carscoops.com/2022/06/elon-musk-backtracks-on-te...
That said, if the message is confusing then either messenger does not know what he is doing or wants the confusion. In his case, I think the latter is more likely.
(I just don't believe him regarding the bots. He always knew bots are a problem and likely under-reported.)
Engineer? What exactly has Musk ever engineered? You could maybe argue "designer" but even that may be generous.
A public persona that he's now diligently working to destroy?
I think he's first and foremost an entrepreneur, and people overstate his engineering ability. In many cases, he shows total ignorance for the realities of engineering (see e.g: hyperloop). I suspect in those cases he is just surrounded by yes-men who don't want to tell him he's wrong.
In general, I get the impression that his success over the years has been contingent on the people he has surrounded himself with. That, in itself, is a skill, though, granted.