Tesla CEO Elon Musk made his biggest direct threat yet to pull out of a deal to buy Twitter on Monday. In a new securities filing, an attorney for Musk argued that he has a right to scrap the deal since he’s not satisfied with Twitter’s responses to his requests for information about how many spam and fake accounts are on the platform.
But as many tech experts pointed out, that’s not really what’s driving Musk’s threat.
Musk has grown increasingly desperate for an offramp to potentially terminate the deal and save face.
What actually seems to be happening is that, as the deal has become less appealing and more financially onerous, Musk has grown increasingly desperate for an offramp to potentially terminate the deal and save face. And it’s not clear that this gambit will work.
In recent weeks Musk has made a number of theatrical public complaints alleging that Twitter has so many bot accounts that he isn’t getting a fair deal and that he’s effectively purchasing a faulty product. But there are two glaring flaws with this argument.
First, as Bloomberg columnist Matt Levine has pointed out, part of the very reason Musk said he wanted to buy Twitter was that he wanted to tackle the problem of spam accounts. His release announcing the deal stipulated that he partly wanted to improve Twitter as its owner by “defeating the spam bots.”
“The spam bots are not why he is backing away from the deal, as you can tell from the fact that the spam bots are why he did the deal,” Levine wrote in a column in May. “He has produced no evidence at all that Twitter’s estimates are wrong, and certainly not that they are materially wrong or made in bad faith.”
Twitter estimates in security filings that less than 5 percent of its 229 million daily active users are bots. When CEO Parag Agrawal explained the outlines of the methodology for making this estimate in a tweet thread, Musk chose not to engage in a serious back-and-forth with him but instead responded with a poop emoji. He never provided evidence or a serious argument for suggesting Twitter’s estimates are wildly off the mark.
But in a sense, all of this is moot anyway, because Musk specifically waived his right to perform due diligence before he signed the deal. MarketWatch columnist Therese Poletti described Musk’s deal with Twitter as similar to the way a homebuyer might approach a fixer-upper:
What Musk has done is akin to a normal person agreeing to waive all inspection contingencies in order to buy a house, signing a contract on the house while publicly proclaiming, “I’m going to fix up this dump,” then deciding during the closing period that the house is too rundown and demanding to be let out of the contract while personally attacking the seller.
In other words, Musk isn’t just saying something that doesn’t make logical sense; he’s also facing huge legal constraints. He could end up getting sued by Twitter for billions of dollars in damages if he tries to back out without finding a contractually valid reason for pulling out.
So what’s really driving Musk? The most immediate reason seems to be the extraordinary financial cost. Tesla stock, which is what Musk used as collateral for many of the loans he took out to buy Twitter, plummeted in May, likely in part because of supply chain challenges and in part because investors were concerned that he’s not focused on Tesla. That in turn has made a nontrivial chunk of his wealth evaporate, and made the deal more costly. Moreover, Musk could be concerned that Twitter becoming an intensifying distraction for him could spook more Tesla investors, and may also be increasingly worried about becoming hugely indebted for this deal. And while Musk certainly seems to seek out the limelight, it’s not hard to see how at least a bit of buyer’s remorse could stem from finding himself at the center of constant controversy due to this deal.
Musk has some truly extraordinary business and engineering accomplishments to his name. But his handling of his attempt to buy Twitter has demonstrated a kind of recklessness and unseriousness that should make people concerned about how he might manage the company itself if the deal does end up going through.