11th November 2022
The acquisition of Twitter by Elon Musk is fascinating – at least to watch from the outside.
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I am not an American lawyer, and I have not seen any of the legal or other documents related to the acquisition.
Like many of you, I only know what I have read in the media and watched play out on Twitter.
But from the information available to me, and based on twenty years’ experience as an English commercial lawyer, there are three elements of this acquisition which may show us things about Musk’s approach to the issue of legal risk.
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The first element is the agreement to purchase, which Musk reportedly sought to get out of.
It would appear that he was unable (or unwilling) to do so, and so had to complete the purchase.
There were two things here which seemed odd.
The first odd thing was that an experienced business person like Musk, who presumably had access to legal advice, could even get seemingly trapped by such an agreement.
The second odd thing was his use of issues such as the number of bot accounts as a basis to get out of the transaction.
It seemed to me that such issues would normally go to warranties than to anything more substantial.
(In this context, a warranty would be a promise that a certain state of affairs existed which would allow a cash adjustment to the purchase price if the warranty was breached – and so the ultimate price of the purchase would be adjusted to what it would have been had the correct state of affairs been known.)
The issues he raised did not appear to me to be convincing, and many better placed observers were not convinced either.
It looked like Musk had put himself into a commercial situation he could not get out.
Few business people, following advice, would have allowed this to happen.
It was a curious situation.
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The second element of this acquisition is the reported disdain for regulatory and other legal risks by Musk and his new managers once Twitter was purchased.
On this, the New York Times has reported:
Musk “was used to going to court and paying penalties, and was not worried about the risks”.
This is an extraordinary position for any experienced business person – but it does accord to his approach to risk as described in the first element above.
Some of the regulatory and other legal risks now facing Twitter are not trivial, from data privacy to employment rights.
The approach described by the New York Times is not even cavalier – it is outright denial and disdain.
What a curiouser and curiouser situation.
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The third element is the very structure of the acquisition.
Musk may be conducting himself online as if he were a buffoon, but those lenders and investors also financing the transaction are serious people.
And if for some reason those lenders and investors were easily impressed by a charismatic figure, their legal advisers certainly would not be.
The position of these lenders and investors here is the greatest puzzle of all.
What were they thinking?
Reuters tells us these are the lenders and investors:
Even if Musk was in denial or disdainful about legal or other risk, these lenders and investors would not be.
Again, according to Reuters:
“Twitter faces interest payments totaling close to $1.2 billion in the next 12 months on the debt that Musk piled on it, following a string of interest rate hikes by the Federal Reserve, an analysis of the financing terms disclosed in regulatory filings shows.
“The payments exceed Twitter’s most recently disclosed cash flow, which amounted to $1.1 billion as of the end of June, according to financial disclosures Twitter made before Musk took it private on Oct. 27.”
Even if Musk’s antics were not foreseeable, the state of Twitter would have been obvious when lenders and investors did their due diligence.
Lenders and investors proceeded even though they were aware of the precarious financial state of Twitter.
Why would they do this?
Perhaps they were confident that Musk would suddenly turn the platform around and generate revenues in excess of costs.
Perhaps they took a view on the risks and thought they could just write it off if the investment went bad.
Or perhaps they were less interested in any return on investment than in the security they could enforce if the transaction went bad.
Some lenders plan on the basis that an investment will go well – and some lenders plan on the basis that it will not.
If Twitter defaults on the payments, it will be interesting – fascinating – to see what security is in place, if any, and what is enforced, if anything is enforced.
Even if Musk somehow though this transaction was free of risk, those who co-financed the transaction would not have done.
What will happen next?
The situation gets curiouser.
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Musk’s acquisition of Twitter is almost as if it were taking place in a magical business world where legal and other risks do not really exist.
A fabulous world devised by, say, Italo Calvino rather than our mundane real world of contracts and regulations.
Perhaps the fantasy will hold, and Musk will pull off a great commercial success.
Perhaps.
But us trudging legal sorts are used to seeing the downsides.
And the utter lack in this transaction of any visible risk-based approach by Musk is remarkable.
If this transaction escapes the world of fantasy, then Musk and Twitter will need to brace, brace.
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Thank you to the introduction to Italo Calvino, a great discovery for me.
When faced with a mystery, apply Occam’s Razor.
What do we know?
1. Musk is a lucky egotist with legions of fans and more money than sense. This we can divine based on being rational adults with experience of Real Life. A subjective analysis, but one that explains the evidence.
2. His investors are not prone to such character flaws. A subjective analysis, but one that explains our observations of their past behaviours.
Therefore,
They have have seen Musk coming. They know him well and have used his ego against him. This includes the owners of Twitter, for their part. When Twitter fails, his investors will take Musk to the cleaners, gain control of all his most valuable products and brands, and clean up. Meanwhile, they allow him to believe, through the prism of his celebrity and self-image, that they will back him and underwrite any failure. It’s a brilliant manoeuvre made in broad daylight, but cannot be respected, just as one cannot respect the bully who beats up a drunk on the street corner: Musk should probably have a minder to look after him.
There are some interesting theories about how this is all some cunning plot between Musk and the Saudis to gain access to Twitter’s user data. Pish. That, or similar, data is readily available from a dozen other sources, already. No one with a few billion in the bank needs to go to these highly-publicised lengths to get access to it. Similar, politically inspired, theories are equally nonsensical, relying, as they do, on the existence of a far more structured and organised world than in fact exists in order for them to be remotely plausible (to wit: the Illuminati do not exist).
Wither now, Musk? I
t is the fate of all so-called “disruptors” that they either become that which they sought to disrupt (see the Virgin empire) or they are ground under heel and taken for everything, including their shirt. Occam’s Razor says we are witnessing this latter process in full HD, right now.
I can only agree with you.
Same here. Your argument seems cogent to me.
You may well be correct on some investors eyeing opportunities if Musk fails utterly (which is probable) but it’s hard to reconcile the views of one particular major funder, Sequoia:
Roelof Botha, the head of Sequoia Capital, said he thinks there are large improvements to be made for Twitter Inc.’s current business and that Elon Musk’s takeover bid for the social-media company will be a success (from WSJ)
He would say that, wouldn’t he. lt’s in his interests of his investment to talk up Musk’s actions.
This approach to risk would appear to be consistent with the approach that someone who thought they had access to a Magic Money Tree might take: I will do what I like and pay for the consequences.
Perhaps Elon Musk thinks he has access to a Magic Money Tree. Does he? He is often described as one of the world’s richest men. Perhaps he can afford this attitude to risk. Perhaps “only the little people” need risk aversion.
I’ve lost tack of where I saw this yesterday, but it seems apposite.
“ As if this needed to be said explicitly: it turns out rich people don’t have some magical ability to instantly solve problems that smart, less rich people have spent a lot of time working on
Though it can be very hard for Extremely Rich people to accept that their success may have had less to do with their transcendent exceptionalism and more to do with timing, luck, social infrastructure and place of birth”
“Legal and other risks” lol. Surely in this (brazen) case the financial jeopardy far outweighs the legal one. Or does the latter compound the former?
The real question may lay in future investment. Many tech companies lose money for years before they stabilize. It’s possible that musk is using this financial mess to excuse rash decisions which may be the cheapest and least risky way to rip out portions of the company not in his plans for the future.
Twitter certainty can’t sustain the interest payments, but musk and the Saudis certainly can. If necessary, a bankruptcy could absolve a lot of debts, but it would also be invasive and limit musk’s overall decision making, so I don’t see that happening.
The Twitter name and user base of businesses, celebrities, and journalists is extremely valuable. I doubt it’s worth 44B, but when you can afford to support that for 10yrs, it’s a hell of a tool…. Especially if you want to control a society and government (as has been made quite obvious)
Unfortunately for musk, the technology is not stable. I’ve worked in this field for 20+ yrs and the “technical debt” is piling up extremely fast and, as software itself constantly evolves, much of Twitter’s codebase will be antiquated or irrelevant in 5 years. The larger you are, the harder it is to change. There are already better ways to structure systems like this, and it’s quite likely that something else that’s more efficient and more effective will appear and Twitter will be too large, clunky and antiquated to move in that direction. But…. Maybe musk can do it.
Financially, this is a boondoggle for anyone but the Uber rich. But, much like politicians putting in millions of dollars of their own money to their own political campaign chests, for jobs that pay 200k/yr, the power is the value. Being able to sway millions of the most wealthy and powerful people in the world from your phone while sitting on the toilet…. Well, Trump proved that was possible and Musk bought that power for a mere 1.2B/yr
Musk could never lay his hands on sufficient funds to control a government unless it let him. Sovereign governments with their own currency have unlimited funds available.
He doesn’t need to control an entire government. His kind of money allows him to control influential individuals in government – which may amount to the same thing in practice.
Yeah but Twitter is vulnerable to becoming just another Bebo
I’m not sure any commercial lender would advance funds without considering what happens in the event of default. They price the risk of default into the interest rate but need to know what recourse they have before making that calculation.
There must be security beyond the shares in Twitter. The obvious security they would demand is a charge over Musk’s shares in Tesla. There is a very real risk that by his actions, Musk could lose any stake in his car company.
With his expressed attitude to risk, and the desire by lenders to focus him on making the Twitter purchase a success, I’d say this is the most likely deal he signed up to.
Lotus built the first generation Tesla cars. Geely now owns Lotus. Geely is ambitious and might well buy in to Tesla if shares were for sale.
The investors who got Musk out of a hole are likely to have calculated an exit plan on twitter’s default. Such a plan may well consider that Geely could pay twice their investment risk for Musk’s shares in Tesla.
Just one of many possible exits which will be good for investors but rather upsetting for Musk.
I believe this is the real risk that Musk faces. I read somewhere that he has indeed pledged Tesla shares as surety for his purchase of Twitter – at a significant discount. (There appears to be a well founded view in the US financial world that Tesla’s shares are premium priced because Musk is the CEO.)
A lot of early analysis of the twitter deal focused on the hypothesis that this was a pump and dump scheme by musk. He was confident he could get out of the deal based on his “it’s all bots” theory, and was actively trying to get out without the billion dollar forfeit that twitter insisted on.
It did do one thing quite successfully (so far) – the SEC seems to have dropped their inquiry into the apparently dodgy initial acquisition of twitter shares he did before this all started, which seems to have been a classic pump and dump play.
I don’t think Musk is an experienced businessman at all. He’s basically a risk taker. He has generally been lucky with risks he has taken, but the success often depends on massive government funding.
The technology he has backed since selling PayPal is either very ambitious, like Space-X or very attractive, like Tesla. Things that need a lot of money thrown at them and high quality engineers to drive forward. As long as he can keep the funding rolling in things the success of the technology will decide the business outcome.
Twitter is very different. It’s established technology and doesn’t make money. Musk seems to have bought it on a whim, realised he’d made a mistake but has had to go through with it. He doesn’t understand the business and has sacked everyone who did. He’s running it alone with no one to tell him he’s getting things wrong. It’s his first real test in business and so far it’s gone badly.
I agree. The über rich, especially if they have made a lot of it themselves (though very few have started out with nothing) conflate riches with wisdom. Many of us learn from our mistakes, a minuscule number learn anything from their successes, least of all that they may have been a lucky conjunction of timing and opportunity.
Based on the public information, the financing of the Twitter acquisition seems a little peculiar to me. But perhaps this is just the sort of thing billionaires do, bestriding the world like some latter-day Rhodes or Rockerfeller.
The purchase price was around $44bn. Musk secured debt funding of about $13bn and equity investment from third parties of about $7bn. He held about $4bn of Twitter stock himself, but the balance of the price (about $20bn, plus transaction costs) seems to be funded by Musk himself. In cash. That is a chunk of change.
He is reputed to be worth around $200 billion, although that was last year and largely based on the value of Tesla stock, several lumps of which he has since sold, and the share price is substantially down too (40% or so) in the last year, but still overvalued.
As things stand, he still has plenty of Tesla stock that he could sell. He still owns around 14%, perhaps $100 billion, and probably ought to be realising some more of that value at its ridiculous P/E multiple. I’m sure he has a few billion in a “rainy day” fund.
But if the stock price falls of a cliff, he could be in trouble. That could never happen. Could it?
What is the scenario if Musk files for protection, as he appears from articles today to be hinting that he might do?
And could the possibility of that being part of his strategy from the outset have affected his investors’ decisions?
From non-financial viewpoint, it might have been a beneficial strategy for the right in terms of its potential to remove what the right view as a hive of non-constrained left-wing opponents.
For over a week I have heard repetitions ad nauseam of a trailer for a Radio 4 programme about Musk. It includes a snatch of a woman saying, “I think he’s smarter than Einstein”.
Another “He’s so smart that the rest of us can’t comprehend the genius of his plan”, alongside Dom Cummings and Vlad Putin.
We really have to get hold of the fact that sometimes, when someone does something that looks really stupid, they’ve just been stupid
Amen.
I think that was Dolly Singh: she was a recruitment consultant who worked as “head of talent” at Space Exploration Technologies Corp. (that is, SpaceX) from 2008 to 2013.
I don’t know how well she knew Einstein to make the direct comparison, but I suspect the quote probably says more about her than Musk.
I’m sure Musk is a clever guy – and intelligence comes in many forms – but I await evidence of Musk doing something as smart as explaining the photoelectric effect, and Brownian motion, and special relativity, and the equivalence of mass and energy, all in the same year. Or even something as simple as general relativity.
It’s an unfortunate fact that a few people command so much money that they don’t care too much about legal risks. Their huge wealth enables them to ride out the legal bumps and, let’s face it, for a handsome fee there is many a lawyer willing to assist.
As they used to say in the north – probably still do – the sellers of Twitter saw him coming !
looking down the list of investors it seems like there are some, a cryptocurrency guy, a saudi prince etc who might be on the more careless side when it comes to risk, and VC’s certainly are used to fairly speculative investing, trying lots of different things in the hope that one will strike gold, I also wonder how much of it is investors getting caught up in the emotion of it all, the feeling that x,y and z are investing so they should too, it might also be that $300m or whatever is not a sum worth worrying about for some of these people/funds, it might not be their money they’re playing with either
If only Mr Musk had considered the implications of an apparent “Magical Thinking” approach to a business acquisition.
He could have read an eminent Law & Policy blogger’s observations on the topic, and avoided what appears, at least on the face of it, to be the overabundance of hubris that only a man “born on third base who thinks he hit a triple to get there” can muster
Musk has very high appetite for risk. You could say he is a risk junky. He is also a complete narcissist and attention addict. He likes being worshipped, but thrives on being notorious. Your analysis assumes he cares about Twitter’s value. He doesn’t care if Twitter burns to the ground as long as he is on the front page. He’s a pump and dump artist. He has a modest cash position in Twitter, and is using the commotion to liquidate his position in his main ponzi scheme Tesla. He will leave everyone else holding the bag insulated from consequence by his cash and his fame.
The approach Musk seems to be taking in business replicates the Trump – Johnson approach to politics. Almost zero consideration for the legal risk because they believe they are above it.
This attitude appears to be catching up with Trump, may penalise Johnson at some stage and will undo Musk.
Well, as you say, brace, brace!
Musk (in his office) has another brainwave – get everyone back into the office full-time.
That’ll sort it out. We need that face-to-to-face interaction, for un-specified reasons.
Next, desperate to recoup some costs from his over-priced and un-researched purchase, Musk has another brainwave – let’s fire half the staff!
Oh, and, despite what Musk said about everything needing to be done face-to-face at all times, curiously, firing thousands of people can be done by e-mail. No face-to-face interaction needed for that.
Years ago, I admit I thought about buying a Tesla.
These days, I’d rather walk than buy anything that would associate me with Elon Musk.