Plain English with Derek Thompson - Musk Meltdown: Elon’s Breakup With Twitter Is Going to Be Very Messy

Episode Date: July 10, 2022

Derek has so many thoughts on Elon Musk's bizarre attempted breakup with Twitter—and what comes next—that he has to enumerate them. In this episode, he goes through five reasons Elon is trying to wriggle out of this deal and three ways this saga will end. Host: Derek Thompson Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

What's up, everybody? Are you tuning in to the Challenge USA on CBS? Well, tune in to me, Tyson Apostle, as I break down each and every episode with my co-host, Amelia Weddemeier. I'm also a contestant on the show, which gives you all the insider scoop. Amelia, how stoked are you to do this? Tyson, I'm freaking excited. I cannot wait to sit my butt down every single week to watch the show, then come here and recap it with you on the Ringer Reality TV podcast. Today, a rant about Elon Musk, Twitter, and what comes next in this strangest romance in tech. So the news in short, which you probably already know, is Elon Musk said he's terminating his agreement to acquire Twitter.

Elon Musk said Twitter misled him over the number of spam bots. Elon Musk said Twitter won't give him enough information about the density of said spam bots. Now, I'm emphasizing Elon Musk said because Elon Musk says a lot of things. And just because Elon Musk says them doesn't make them true or legally binding or even legally relevant. What is true and legally binding and legally relevant is that Musk has a merger agreement with Twitter, which Twitter says it will try to uphold in court despite everything else that Musk is saying. So Twitter's like a bride being dumped at the altar, holding up the marriage contract, the runaway groom, like a read the fine print buster,

we're way past Speak Now or Forever Hold Your Peace. You want to divorce, it's going to cost you, and I'll see you in court. And that is basically what Twitter is saying in response to Elon Musk's attempt to break up with them. Twitter's chairman of the board, Brett Taylor responded on Twitter. Quote, the Twitter board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware. Court of Chancery?

End quote. What is the Delaware Court of Chancery besides a perfect sequence of words? Court of Chancery. It resolves disputes between companies based in Delaware and Twitter is based in Delaware. So that's where we are.

Elon Musk said I won out. Twitter said, no, we're already married. Time to talk about why this is happening and what is likely next. So why is this happening? As I said when Elon first announced he was buying Twitter, when a car and Rockets executive who made his name in digital payments buys a website where people

scream at each other about the news, anyone who's extremely confident about what's going to happen next does not know what they're talking about. And indeed, a lot of people who were extremely confident about turned out to not know what they were talking about. But I can imagine at least three scenarios for why Elon went through this whole topsy-turvy rigmarole. Scenario number one is that Elon Musk is telling the full truth. He cares about the bots. He's aghast about the bots. He wanted Twitter, but he took a close look,

and it turns out that social media is a mess, and it's fake, and it's got a bunch of fake accounts, and it pains him. It pains him to see all of these bots. This is completely laughable, but I'm willing to bend over backward and take it maybe even a little bit more seriously than it deserves.

So in its SEC filings, Twitter has said that about one in 20 of its daily active users are bots, like false or spam accounts. Now, Elon's central claim in this breakup and in the document that his lawyers sent Twitter is that Twitter is, quote, dramatically understating the proportion of spam and false accounts. Now, is it possibly right? Is it possible that Twitter says that 5% of its accounts are fake, but actually 6% percent 0.7% of its accounts are fake. Of course, it's possible. But the reason it's really, really hard to take this excuse seriously is that the overpopulation of bots is one of the reasons

Elon said he was obsessed with taking over Twitter. On April 21st, Elon tweeted, quote, if our Twitter bid succeeds, we will defeat the spam bots or die trying. End quote. Do you see, You can't say, I want to take over the sandwich shop and clean up the kitchen. And then, after signing the contract, say, I'm suing you to get out of this deal because I check the kitchen. And it's filthy. You just said you were going to clean up the kitchen or die trying. You just said that. This looks unbelievably hypocritical.

And that's why I don't think we can take it very seriously. So that brings us to scenario number two. And scenario number two is that this was always a prank, a lark, a whimsy, Elon didn't really want to buy Twitter. Jack Dorsey just sort of voodoo brained him into buying it. Or maybe he bought it. And then he just immediately lost interest, like, you know, someone who's only in it for the chase. I can't rule this out.

But like feeling extremely confident about a psychological explanation requires a lot more information about Elon Musk's psychology than I have access to. So I don't want to put too much stock in this. Scenario number three is that this was always a ruse. a ruse to conceal the fact that Elon Musk needed to find some clever way to unwind Tesla stock without freaking out the markets. I saw this theory floating around quite a bit on Friday. My friend, the venture capitalist, Josh Wolfe, was musing about it. I think this is very clever, very, very clever, and probably too clever by half.

Like, Elon, if he wanted to execute the Tesla stock sell plan, should not have signed a legally binding document to buy Twitter. Like, think about this. He should have sold the Tesla stock, tweeted that this was entirely about freeing up cash to buy Twitter, and then just never signed the merger agreement so that nothing could be enforced by the freaking Delaware Court of Chancery, right? That's a much better plan. Don't freak out the markets, sell your Tesla stock, take it in cash, and before anyone can freak out, say, I'm going to use this cash to buy a company that you never sign a merger agreement to actually buy. Much better plan. He didn't do it. That tells me that at some point this was actually about buying Twitter rather than about not buying Twitter. And that takes us to scenario number four, which is the scenario that I prefer, the price ain't right. Elon Musk might be the most unrelatable person in the world, but this is totally relatable. Maybe it's stupid. Maybe it's weird, but it is totally relatable.

The market has crashed. The price he's on the books or on the hook for to buy Twitter is high. This deal sucks for him. Imagine if you're trying to buy a house. There's a house down the street, beautiful corner. You've always loved it. But a crazy family lives there. Absolute nutcases.

Everybody agrees. This house would be so wonderful if something. Somebody else owned it. And then one day the family lets it be known that they're maybe putting up the house for sale and boom, you spring at the opportunity. You make a huge, sudden rash bid, $1 million, bam, on the table, way more than any zelo estimate. And the family in the house is like, hmm, you know, we'll look at your offer, I'm not so sure. You say, oh, I'll wave diligence, a wave inspection.

I don't care. I don't need to see if there is mold in the kitchen or a sinkhole in the bathroom. I need this house now. here's my ironclad purchase agreement, give me the house. And they're like, okay, fine, here's the house. Congratulations. You now have your dream house, but then everything goes wrong. Days later, your financial advisor calls, hey man, sorry, that emerging market fund we went all in on, it's down 50%. Oops. Realtor comes out with a report on housing values in the area and determines the average home value in that neighborhood you just bought in, plummeted by like 70% in the last few weeks.

Now, just two seconds ago, you had a beefy portfolio to pay a small premium for your dream house. And now that portfolio is tanked and the price you offered for the house is way above its market value. Like, what would you do in this situation? What would you literally do? Is it so implausible that you'd call your lawyer and be like, dude, get me the hell out of this? I don't think it's much more complicated than that. Twitter was Elon's dreamhouse. Then his core business, Tesla, tanked financially, taking down a business.

his net worth with it, and creating a bit of a crisis that required his attention that needed to shift away from Twitter. Like, here are some numbers. Between April, when Musk was finalizing this offer and July, Tesla's stock crashed 40%, so we can assume that Musk's net worth took a similar hit. As for Twitter, it's hard to say what the company's stock should be, because it's currently held aloft by the Musk contract in all likelihood, but we can make an estimate by looking at its closest proxy, which is Snap, the owner of Snapchat. Snap is also a social media company, and it also

is an advertising company. At its April high, Snap was worth about $70 billion. By July, its market cap had fallen to about $26 billion. If you apply that same depreciation math to Twitter, you're looking at a company that should be valued around $15 to $20 billion. Musk's contract says $44 billion, for a company that should be worth maybe $17. this deal sucks. It just might not be more complicated than that. Musk wants out of this deal because this deal sucks. So what's next?

Well, who knows? A lot of media commentators reported this story by saying Elon Musk cancels Twitter deal. Elon terminates the Twitter merger. No, no. This is nothing near to that level of finality. Nothing has been canceled. Nothing has been terminated. What matters here is not what Elon Musk says, but that there's a contract, and the contract

was written to expedite a sale, to bind the parties together, not to give Elon Musk a thousand trap doors through which he could escape whenever he got bored or antsy or nervous. Musk is allowed to wriggle out of this deal in the event of a so-called materially adverse change that significantly reduces the value of the company, like, I don't know, everyone's iPhone disappears or something. or if it is determined that Twitter lied, falsely represented something that is of material significance to the company. And material significance, again, is not for Musk to decide. It's not for his lawyers to decide. It is for our friends at the Delaware Court of Chancery.

So in my mind, there are three ways this thing ends. Three ways. Scenario number one is Twitter caves. Twitter caves either by letting Musk walk or by negotiating a lower price or by negotiating some cheap breakup deal. This all seems incredibly unlikely to me. If you were in possession of a document that you believed to be worth tens of billions of dollars, would you rashly set it on fire to play nice with a billionaire? I don't think so. And that's what Twitter has. Twitter has with this contract, a document that is worth tens of billions of dollars that values the company at tens of billions of dollars more than it is likely to trade at in the event that this deal disappears. So I do not think Twitter is very interested in caving. That brings us to outcome number two.

Outcome number two is that they go to court and Elon Musk wins. His lawyers win. His lawyers persuade the court that Twitter's bought accounting really is fraudulent, that it really has done something else weird that is bad. There's a discovery process that's a disaster for Twitter and the company and its executives and the company loses to Musk. And after that, it is reputationally destroyed because of what comes out in discovery. That is the dream case scenario for Elon Musk. I think it is also somewhat implausible. Which brings us to number three.

And number three is that they go to court and Twitter wins. They win. Discovery is embarrassing from Musk. It makes clear just how whimsical and ramshackled this whole acquisition process has been. Twitter lawyers persuade the court in Delaware that Musk's claims don't meet any relevant threshold for material adversity.

The court makes Musk's, fund the entire $34 billion equity commitment or some extraordinary multi-multi-billion dollar commitment. He has to sell even more Tesla stock to fund that commitment. And now, in most of these scenarios, he ends up as the proud or not so proud owner of a dream house he no longer wants. Bill Simmons once came up with the phrase, the Tyson's zone, after Mike Tyson's antics, to describe times when you truly have. no idea what's going to happen next because every crazy scenario is on the table. I would like to

submit that in technology, we are in the Musk zone here. Elon Musk could win, he could lose, he could buy Twitter, he could sell Twitter, he could jump on a rocket ship and evade the entire court system by moving permanently into low orbit. It is all on the table right now. I want to end by saying that just because every realistic timeline is somewhat entertaining for tech observers, It is also true that just about every realistic timeline sucks for Twitter as a firm right now. Like, if this drags out for months with that resolution, that sucks for people working at Twitter. If Elon is forced to buy Twitter and doesn't want Twitter, that sucks for people working at

Twitter. And if Elon gets away with a breakup fee, well, the stock is probably going to crash at least 50%, which also sucks for people working at Twitter. So again, this might be entertaining for the tech world, for listeners, for people like me, but I cannot imagine what it's like to be in Twitter right now, in the epicenter of the Musk's zone. That's all for today. I'm Derek Thompson.

This is plain English.