Elon Musk has apparently discovered that there may be more bots and fake accounts on Twitter than Twitter had led us all to believe. No sh$t Sherlock! This is turning into a proper soap opera that Succession is going to find to beat!
Elon puts Twitter deal on hold
Back Story: The news broke yesterday (Friday):
He followed it with: “Still committed to the acquisition.”
The question is, is he really?
On the face of it, this is clear cut. Elon is calling into question Twitter’s public filings where Twitter have said spam/fake accounts are less than 5%. He’s taken to Twitter to say that he’s going to do random sampling of his following and work it out for himself.
On the quarterly earnings call at the end of April, Twitter released details of its user base. They reported daily active users were 229 million (up from 199 million a year ago). Crucially, Twitter stated in the statutory filing that spam accounts were less than 5% of the user base.
But here’s the thing, external audits put the figure closer to 13-15%. I know this. You know this (because I wrote it in a newsletter in the last couple of weeks.)
So, the question is, what’s this really about?
- Is this a smokescreen from Elon to get out of buying at $54.20, a price that seems overinflated and significantly above its market-determined natural level?
- Or, does he just want out altogether, because he’s gotten bored with it?
- Or, maybe he just can’t raise the money, given that the golden eggs from the Tesla goose aren’t looking so golden at the moment?
IMHO: it’s a smokescreen to get out of a shitty deal. His problem is that he has made a firm commitment to buy via a water-tight contract. When he signed this binding offer, he forego any further due diligence on Twitter.
He also tied himself to a $1 billion penalty if he was to pull out early.
As far as the Twitter board are concerned, they have a firm commitment from Elon to turn up with a moneybag filled with $44 billion in cash.
For Elon to get out of it entirely, he’s going to have to convince a US court that a discrepancy in the number of bots and fake accounts has a material adverse effect on his decision to buy.
The key indicator is Tesla stock price
When Elon announced his intention to buy, the Tesla price started to fall. To be fair, the whole market is down because of a range of factors. But, up until now, Tesla stock has defied gravity. It’s never been worth $1,000 a pop based on the fundamentals alone of the business.
It reached that price because of unquestionable faith in Elon as the TechnoKing.
In the 6 weeks since Elon went public, Tesla stock is down 25%. In the remaining hours of trading yesterday, Tesla stock rose 5.7% (making Musk about $9.5 billion richer on the day).
Meanwhile, Twitter’s price tanked 17%, dropping to $40, a clear indication that the market has never believed Elon will buy Twitter anyway (even though he’s made a binding offer to buy at $54.20, the price of Twitter shares has never even gotten close to it).
Here's the thing: Elon’s ability to raise the cash is tied to the Tesla share price. As well as a belief in him as a techno messiah who can clean up Twitter for the good of “civilisation”. But the key to his ability to leverage his wealth and become the most indebted CEO in US corporate history is the value of his piece of Tesla.
What next for Twitter?
For the past few weeks, Elon has been acting like he already owns Twitter. He’s ignored the fact that he doesn’t and that there is a management team and workforce in place trying to run the business as normal.
This has been hugely disruptive to Twitter. As a shareholder myself (I have a very small shareholding), I’m really cheesed off. If I wanted to sell (which I don’t) on what basis can I do that? Nobody knows what disruption he’ll inflict tomorrow.
For me, I see Twitter as an underperforming product that makes a modest $1 billion a year in EBITDA. It has the potential to be much bigger and better. But not whilst Elon is driving from the back seat.
The big question is what do the Twitter board do next?
- Would they/should they negotiate a lower offer? If so, how much lower? $45? $35? $25?
- Should they put an end to this and get back to running the business, telling Elon to go away, taking the $1 billion and ploughing into product development?
- Should they go talk to someone else? (Unlikely as no other suitor has shown up and Twitter isn’t worth $44 billion ATM.)
If they wanted to inflict a painful wound they could remove Elon from Twitter. And who would blame them? They’re a commercial business and able to make that decision entirely on their own.
Without his 93 million Twitter followers, Elon would have a significantly reduced audience for his free marketing of Tesla, SpaceX and the rest of his portfolio.
But they won’t do that.
Twitter has a global brand and position as the number 1 platform for citizen journalism and public square debate. It should and could be bigger and better than it is.
Although I fundamentally disagree with the “free speech absolutionist” idealism that says it’s ok to tweet the holocaust isn’t real or that Sandy Hook was a fake, I did believe that Elon would bring product innovation to Twitter.
Net/Net, I thought he could be a good thing for the platform.
Did I believe his musings that he’d take it from a $5 billion to a $25 billion company in 5 years? No, I didn’t see that. But who would question the man-child genius when he says things like this?
On the positive side, I believe that he would clean up Twitter and make it a safe place to hang out. That would mean putting an end to the fake accounts and spambots (although the irony of all this is that Musk and the Tesla share price would have benefited from bot activity on Twitter).
I also think that Twitter needs to be become a SFW platform and remove the porn and violence that is prevalent.
However, for this weekend anyway, all of this is on hold while Elon makes his mind up. He’s got form when it comes to setting big expectations and not following through.
However it develops from here, this one will cost him, whichever way he turns.
📕 Further Reading:
- Elon Musk’s Early Morning Tweet Sends Twitter Shares Crashing, But He Ends The Day Billions Of Dollars Richer (Forbes)
- Twitter’s bot problem not likely to enable Musk to back out of deal. (Wall Street Journal)
- Trump says there is 'no way' Elon Musk is going to buy Twitter now. (Yahoo News)
- Corporate Law Expert Says Musk Can’t Just Walk Away From Twitter Deal. (Barron's)
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