There’s a lot more at stake for Elon Musk (and the companies he controls) in the unfolding drama at Twitter than losing a Delaware Court of Chancery case and being legally obligated to pay billions of dollars above the market price to buy Twitter .
The biggest issue is Musk’s reputation as a reliable business counterpart.
I have been involved in tech M&A in Silicon Valley for over 20 years and consider myself a fan of Elon Musk as an entrepreneur. I always root for Tesla TSLA,
SpaceX, Hyperloop and all his other innovative efforts to thrive and help build a better future for us all. That’s why I’m deeply troubled by the way Musk has canceled the Twitter acquisition and the attitude of his legal team since then.
On July 8, Musk announced on Twitter that he was canceling the purchase. He blamed Twitter’s failure to produce enough information about unwanted accounts (or spam bots) on the platform, which he considers a violation of the merger agreement. Four days later, Twitter sued Musk to force the billionaire to complete the transaction. Whether Twitter was obligated to provide the information Musk requested, and if so, whether it failed to provide such information, will be the focus of the trial in October.
There are two main theories as to why Musk wants out of the deal: (a) buyer’s remorse, or (b) an actual breach of contract by Twitter. If Musk’s actions are truly due to buyer’s remorse and a desire to get out of what he may consider a bad financial deal by catching some technical loophole in the contract, then he is breaching his contract in bad faith. and in doing so is knowingly setting fire to his reputation as a member of high integrity in the business community. A deal is a deal, even if it’s a bad deal in hindsight. He wouldn’t have allowed Twitter to not sell to him if, for example, Twitter’s revenue skyrocketed after they signed the deal.
Instead, let’s consider the possibility that, as he alleges, Twitter has failed to meet its obligations of care and disclosure under the merger agreement. Unfortunately, it’s hard to take this possibility seriously when you consider Musk’s actions and his legal team’s litigation stance.
The first problem here is that instead of suing to force Twitter to disclose and provide what it needs, Musk walked away from the deal. This course of action makes little sense to someone who is contractually committed to an acquisition, as his signature on that merger agreement indicates.
Imagine finding your dream home and closing a deal to buy it, but then the sellers drag out some of the key disclosure statements. Do you simply cancel the purchase or take whatever action is necessary to force the sellers to honor their contract?
By insisting on canceling the deal before getting all the information he needs, Musk is certainly sending the signal that his priority is finding a way out rather than getting information and uncovering the facts about the junk accounts.
“ A deal is a deal, even if it’s a bad deal in hindsight. “
The second problem here is his legal team’s objection to Twitter’s motion for a speedy trial, arguing that “their dispute over fake and spammy accounts is . . . extremely fact- and expert-intensive, requiring significant discovery time,” asking for a trial date to be set sometime next year. However, Musk also maintains that he believes Twitter’s email problems are serious, and that underlies his decision to end the deal.
All of which begs the question that if Musk has a justified belief here, why will it take his legal team until next year to prove it in court?
And finally, there is a real human cost. Despite his public disagreements with Twitter’s board or management, Twitter is a company with roughly 8,000 employees, mostly innocent bystanders caught in the crossfire. The lives of these employees have been thrown into oblivion since the acquisition was announced in April.
To make matters worse, Musk even announced to all employees in June that he would likely lay off some of the workforce. If he was truly committed to continuing the acquisition, would he want to demoralize the workforce like this?
For tech companies like Twitter, the biggest asset is the team. A serious buyer would not want to take the time it takes to complete a deal, because any delay increases the risk of losing some of the most prized talent. The same buyer would like to ensure the fastest resolution to any dispute that arises during the purchase process.
As a former corporate lawyer and someone who has been on multiple sides of M&A transactions since the late 1990s, I would advise Musk to pay more attention to the court of public opinion and his reputation as an acquirer and business partner rather than playing courtroom games. He must clarify the data underlying his belief in Twitter’s spam problem and find the fastest way to bring this matter to a fair resolution.
Otherwise, no matter how the court case plays out, he (and his companies) will lose a lot of credibility in any business deal. Who would want to enter into any kind of meaningful contract with someone who has a reputation for reneging on their promises?
Touraj Parang is a veteran Silicon Valley entrepreneur and is president and chief operating officer at Serve Robotics, which he helped spin off from Uber. He is also the author of Exit Path: How to Win the Startup End Game.
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