The battle to own Twitter—or more accurately, to not own Twitter—will culminate in a courtroom on October 17 in Delaware, and the trial is expected to run for five days. Tesla boss Musk is trying to avoid being compelled to complete his $44 billion offer for Twitter, claiming that the company has too many fake accounts. According to the initial terms of the deal, Musk needs to pay $1 billion to get out of the contract.
Twitter’s lawsuit claims that “Musk refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests… Musk apparently believes that he — unlike every other party subject to Delaware contract law — is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away.”
In a response to the Securities and Exchange Commission, Musk’s legal team says that “In short, Twitter has not provided information that Mr. Musk has requested for nearly two months” regarding spam and fake accounts.
The market price would seem to suggest that despite the turbulence of the last few months, Twitter is worth roughly the same as when this all started - and that Musk will not be forced to buy the company for $54.20 per share. If investors were highly confident that the deal would be forced through at that price, then the shares would reflect that, and be much closer to the deal price.
This is the so-called merger arbitrage - the amount in percentage terms that a stock sells for before a deal compared to the price if the deal goes through. In most cases, the amount is greater than zero, given that there is some risk of a deal failing. According to Secor Asset Management, in 2021 the typical spread was 6-8 percent. As it stands, Twitter shares are currently trading at nearly 30 percent lower than the deal price.
The Musk Bid and Twitter Share Price
On March 24, Musk began to make statements that alerted investors to a possible takeover. He asked (in a Twitter poll) whether the algorithm should be open source. By this time, he had accumulated a substantial stake of over 5 percent in the company, but this had not been revealed at this time.
Twitter’s share price on this date was $38.82. From this point on, the shares started to move upwards.
As Musk’s interest in Twitter turned into larger share purchases and then into a formal bid for the whole company in April, Twitter’s share price surged. The biggest leap was on April 4, when Twitter’s stock went from $39.31 to $49.97.
The price stayed around $50 for a while, but it never got to the level of $54.20, the price per share that Musk offered, which showed there was a degree of uncertainty about whether the deal would be completed. As Musk began to make comments - on the Twitter platform itself - about the company, casting uncertainty on the number of fake or spam accounts, the share price began to fall.
Twitter began to suffer from several high-level departures, and as Musk tried to pull out of the deal in July, shares fell towards the $30 mark. A recent market rally saw the company recover to over $40, but now, nearly five months on from the initial talk of a potential Musk deal, shares are at $38.40, almost exactly where it was before the talk of the sale began.
Musk continues to make comments about the level of bots on the platform. On September 1, he tweeted a link to an article published by The Australian, titled “Eight in 10 Twitter accounts are fake, says expert”, saying “Sure sounds higher than 5 percent!” and followed up with “On a $/bot basis, this deal is awesome”.
There is also a new element to the battle, whistleblower Peiter “Mudge” Zatko, Twitter’s former head of security. Last month, Zatko said the company allegedly deceived federal regulators and its own board of directors about “extreme, egregious deficiencies” in its defenses against hackers.
Zatko also said that Twitter’s method of estimating the number of bots is misleading and that staff is incentivized with large bonuses to boost user counts rather than remove bots. He also accuses Twitter of breaching an agreement with the Federal Trade Commission to uphold security standards.
Zatko’s statement has given Musk more ammunition in his legal case, and prompted Musk’s team to ask for the trial date to be delayed. So far, it is still scheduled for October 17.
