Twitter to Musk: Pay Up

However this tweetstorm ends, Elon Musk will come out a loser.

This spring, the right-wing celebrity tech CEO agreed to pay $44 billion for Twitter — boasting that he would turn his favorite social media site into a bigger revenue machine and a bastion of “free speech.” (Critics interpreted that as Musk condoning a flood of misinformation and harassment.)

A little more than 10 weeks later, Musk told Twitter he wanted to kill the deal.

What happened? After waiving his right to due diligence in the Twitter agreement, the entrepreneur complained that he suddenly needed verification of Twitter’s estimate that fake and spam accounts are less than 5% of its total user base. On July 8, Musk’s lawyers accused Twitter of failing to provide necessary data after his repeated requests and claimed the company made “false and misleading representations.”

Twitter called BS. It sued Musk, demanding that the world’s richest person fork over the $44 billion he promised. Twitter’s lawyers say Musk simply has buyer’s remorse — after a sharp drop in the price of Tesla stock, which represents the majority of his net worth — and has acted in bad faith. Musk has “repeatedly disparaged Twitter and the deal, creating business risk for Twitter and downward pressure on its share price,” the company says in the suit.

Last week, the Delaware Court of Chancery, which specializes in such business disputes, ruled in Twitter’s favor, rejecting Musk’s attempt to delay the start of the case until next year. The trial is set to take place in October — but analysts believe there’s a good chance Twitter v. Musk will be resolved before then. Both parties have an incentive to reach an out-of-court settlement and avoid a time-consuming, costly and embarrassing sideshow.

Twitter is widely seen as having the legal upper hand against the meme-loving mega-billionaire. “I don’t think Twitter actually is looking to get sold. They’re just trying to get as many billions of dollars as they can, as quickly as they can,” says Scott Kessler, analyst at financial research and advisory firm Third Bridge.

In its lawsuit, Twitter effectively set $44 billion as the ceiling in negotiating with Musk. It’s unlikely Musk will get away with paying only the $1 billion breakup fee to wash his hands of the situation, experts say. To walk away from the deal, Musk may end up agreeing to pay upwards of $10 billion, says Columbia Law School professor Eric Talley, a specialist in corporate law.

Musk’s best legal argument, that Twitter dragged its feet in complying with info requests and thus breached the merger agreement, is a long shot, according to Talley. Historically, the Delaware court has not been very forgiving to buyers involved in busted transactions after they got cold feet.

The Musk legal team is “going to see how much of this Pandora’s box of bots they can crack open so they can turn this into a giant data-science war,” Talley says. But Musk’s actions have the veneer of disingenuousness, he adds: “This has all the trappings of someone who makes all kinds of requests in order to later claim the seller violated the agreement.”

Twitter has blamed Musk for hurting its business, attributing its revenue miss in the second quarter of 2022 in part to “uncertainty related to the pending acquisition” by Musk, alongside a slowdown in ad spending. The company recorded $33.1 million in expenses related to the transaction in Q2. Twitter has set Sept. 13 for a shareholder vote on the Musk deal, which given the legal imbroglio should be only a formality.

So Twitter is eager to close the chapter on Musk ASAP. For Musk, though, in addition to the multibillion-dollar check he will have to write to Twitter, the damage may be longer lasting. These days, what used to be admired as renegade, out-of-the-box leadership by ultrarich industry titans looks out of touch — and is a turnoff for consumers, says Mario Natarelli, managing partner at branding agency MBLM.

“The brand halo around Musk and his companies,” says Natarelli, “will inevitably be damaged.”

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