Elon Musk’s Twitter Deal Has Become A Multibillion-Dollar Game Of Chicken

Over the last two months, quite a few labels have been applied to Elon Musk’s proposed $44 billion takeover of Twitter. The buyout has, variously, been called a saga, a drama, a clash, a battle and “capitalism gone rogue.” When a story involves someone as colorful as Musk, and when the narrative keeps shifting as it has, it’s easy to gin up increasingly colorful terms to describe the goings-on.

Why stop there? Musk certainly hasn’t. The storyline shifted again on Monday with Musk flatly stating what he has been saying implicitly for the past several weeks: He’ll call off the deal and walk away unless Twitter lets him see the data used to calculate its estimate about bots and spam accounts that may be inflating estimates of traffic to the site. Twitter says he can’t, and it won’t.

At this point, calling the Musk-Twitter deal a saga or a drama sorta undersells what’s going on. The deal now looks a lot like a game of chicken. Musk is behind one wheel, and the Twitter board piles in the other, sending the two cars hurling towards each others.

The game’s dynamics begin with Musk’s assertion that there are many more bots on Twitter than the company acknowledges. Parag Agrawal, Twitter’s CEO, maintains that spammers make up less than 5% daily active accounts. Musk suggested that the number could be five-fold higher.

Musk on Monday said Twitter’s failure to provide him with data on the bots constitutes a “material breach” of the merger agreement, a great enough violation for him to terminate the deal. He argued an alternative point earlier, suggesting that the discrepancy between his figure and Twitter’s might be enough to call off the deal, possibly because a variance between his number and Twitter’s might constitute fraud on Twitter’s part–or, if not outright fraud, then discovering the inconsistency might fall under the category of a so-called “Material Adverse Change,” a sudden event that would materially and adversely change the course of Twitter’s business. If advertisers found out the place was, in fact, a ghost town full of fake profiles—fake people—they’d probably be less inclined to pay for ads there. This is a very bad situation for any company that relies on advertising revenue. You could even say that it was very materially negative.

Could you argue that Musk is capable of proving each case in court? This is where lawyers and legal professionals tend to haw. They generally answer that it is unlikely. Experts say that the recent bit regarding Twitter’s refusal to share its bots data is particularly thin. “There isn’t a specific term in the merger agreement that obliges Twitter to do what Musk is asking, and so Twitter is not breaching the agreement if they refuse,” explains George Geis, a corporate law professor at the University of Virginia. “Most merger agreements do have an obligation on the sellers’ part to assist the buyer with due diligence. But Musk waived that.” Yes, he certainly did forgo his right to due diligence back in April when he first struck a deal with Twitter’s board.

But what if Musk isn’t searching for a sure-proof legal case? What if he just wants: “Leverage,” says Geis. “My sense is that at some point maybe a week or two ago he asked his lawyers to take a closer look and said, ‘Get me real leverage on the transaction.’”

This is why it doesn’t really matter whether Musk is correct about the bots or whether Twitter is. Musk doesn’t need to be correct and win a trial. He just has to find something in order to start a case and finish Twitter without wasting time with litigation. And he’s likely already found enough to do that, those same experts say. Musk can afford to wait and afford the million-dollar fees his Skadden, Arps lawyers will accumulate; publicly traded Twitter doesn’t have the same luxury of limitless time. Twitter’s board may have once viewed selling the company to Musk for $54.20 a share as a sensible fulfillment of its fiduciary duty to investors–Particularly considering the fact that the stock market plunged following approval of the deal. But does forcing the business into a perilous state of years-long limbo—as the courts sift through Musk’s case—fulfill the same duty? Shareholders may disagree, even if the board accepts. Investors must still vote on the deal, and that will occur at a later date in this year.

Predicting how this game of chicken ends—a contest that has already proven so unpredictable—seems to beg the possibility of getting a face full of egg. For the sake of a fulsome discussion, though, here’s an educated guess at the outcome: If the markets stay depressed, the Twitter car slams on its proverbial brakes first, and the board renegotiates. Musk has much more to lose in this lengthy Delaware court process.

This conclusion is supported by two additional points. Musk removed a margin loan that could have been a problem from his $45 billion package, and rearranged the funding he needed to finance his bid. You don’t want to change the terms of funding you don’t need. Then there is the plain, time-tested fact that most fine-print M&A disputes almost always end with the two parties making up and consummating the transaction. A lawyer or several lawyers will be able to point out a few examples of transactions that went through all the courts. As it happens, in the most recent example from 2018, a court did allow German healthcare company Fresenius to walk away from its purchase of Akorn, a generic drug manufacturer, though the scale of Akorn’s problems do seem drastically greater than even the most fluffed-up figure about bots on Twitter.

Fresenius Akorn, however, is an exception. More often than not, things generally conclude as they did for LVMH when it bought Tiffany & Co.. The two luxury companies sued each other in 2020 after LVMH tried to scupper a deal to buy Tiffany, citing the pandemic’s effects on the jeweler’s business. After Tiffany had agreed to pay a lower price of less than 3 percent, the two luxury companies settled outside court.

“If you want to get a discount on something, you don’t go and say, ‘I want a discount,’” says Andrew Verstein, co-director of UCLA’s Lowell Milken Institute for Business Law and Policy. “You just need to have some pretext on which a seller can go to their constituents and say, ‘Look, this guy drove a hard bargain, and he pointed out some issues, and we were willing to cut a new deal.’”