The Breakdown - Elon Pulls Out

Episode Date: July 12, 2022

This episode is sponsored by Nexo.io, Chainalysis, FTX US and Ava Labs.   After months of dithering, Elon Musk announced last Friday he would officially be pulling out of his deal to acquire Twitter for $44 billion. He cited as his reason a lack of transparency or clarity around the true number of bot accounts. In this episode, NLW describes what different commentators think is really going on. He also vibe-checks both crypto and TradFi as we head into what will likely be a big week in markets.  - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Ava Labs releases Core, the free, non-custodial browser extension, built for the power of Avalanche. Core is an all-in-one operating system bringing together Avalanche apps, Subnets, bridges and NFTs in one seamless, high-performance experience. Eager to start using Web3 dapps to their fullest potential? Download today at core.app! - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: Dimitrios Kambouris/Getty Images for The Met Museum/Vogue, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, July 11th, and today we are talking about Elon's attempt to get out of the Twitter purchase deal. Before we get into that, however, if you are enjoying the breakdown, please go see. subscribe to it, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us at the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, this week I am thrilled to welcome Avalabs as a sponsor.

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Well, friends, this is shaping up to be an absolutely juicy week. In the crypto space, the fallout of Three Arrow's Capital continues with reports that no one knows where these guys are, even as creditors are knocking on their door. In macro, we've got inflation numbers coming this week, which will, of course, have significant implications for what the Fed does next. But before all of that, let's start this week with a bit of news that broke at the very end of last week. After months of back and forth all happening very much in public, Elon has pulled out of his deal to buy Twitter. On Friday, Elon Musk announced that he was pulling out of the $44 billion

deal to purchase Twitter. His reasoning was that he cited a lack of disclosure from Twitter regarding spam and bot accounts. Twitter for their part were not happy. Almost immediately, Brett Taylor, the chairman of the Twitter board, tweeted, 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. Now, this is not the first we've heard of this issue coming from Elon. In May, he stated that the deal was, quote, temporarily on hold while he awaited data on spam and bot accounts. Twitter has asserted that less than 5% of users were fake, while Musk believes that as many as 20% of Twitter users

might be fake. In a letter filed with the SEC, Musk's lawyer said that Twitter had failed to disclose this data adequately. Quote, sometimes Twitter has ignored Mr. Musk's requests. Sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it is claimed to comply while giving Mr. Musk incomplete or unusable information. Shares and Twitter fell 7% on the news. So let's talk about the legal side of this for just a minute. As you heard, the dispute will now likely be heard by the Delaware Court of Chancery. Twitter stated that they intend to file the lawsuit this week and has retained Wachell Lipton, Rosen, and Katz, LLP, to litigate the case. This is a top corporate litigation firm, so it's clear that Twitter is serious. Now, the initial deal did have a break clause which allowed

Elon to escape the deal by paying a $1 billion fee, but this is only if there's an outside reason that the deal can't close. This would be something like regulatory intervention or third-party financing failures. The other possibility is that Musk could escape the deal if there is fraud in Twitter's disclosure of their data relating to bot activity. That fraud likely needs to be to the legal standard of, quote, material adverse effect. Larry Hammermish, a law professor at UPenn, who specializes in Delaware corporate litigation, describes this threshold as a, quote, unexpected, fundamental, permanent negative development. Now, Elon for his part has so far not directly alleged fraud. His statements are about a lack of sufficient disclosure to evaluate the

bot problem. The acquisition was finalized at 5420 per share when the deal was closed in April. That was a 5% premium on the price at the time, 65% above the low point in March before acquisition rumors began, but the stock is now trading below $40. It should be pretty obvious, but I just want to point out that you can't get out of a binding deal that's already done just because the stock price hasn't done so well in the meantime. Now, some of Elon's previous actions could also be relevant in this case, such as waiving due diligence. Essentially, he stated that he was satisfied with the company once the deal was closed, and now he will actually need to show that there was true fraud in Twitter's representation of the bot problem. This is

especially the case given that Twitter bots were a key point of discussion from Elon even prior to closing the deal. As so often happens, I think that Matt Levine from Bloomberg really has this one pretty well articulated. Quote, I know I am screaming into a well here, but a very bad thing is people going around saying that Elon Musk, quote, waived due diligence, and so can't bring up the bots thing. Now, it is true that Musk seems to have declined to do much or any non-public due diligence, but that is not relevant to anything now. Due diligence in U.S. public company M&A usage is a thing that you do, all caps for emphasis, before you sign the merger agreement. You do due diligence to decide if you want to buy the company.

Then, having decided, you sign an agreement to buy the company. At this point, due diligence is over because you have made your decision. A merger agreement in U.S. public company M&A usage is not an agreement to look into the company, evaluate its business, and decide whether you want to buy it. It's an agreement to buy it. The reason that Elon Musk can't get out of the deal over the bots thing is not that he, quote, waived due diligence. It's that he signed a binding agreement to buy Twitter.

and that agreement does not have any outs for, I think there are too many bots. Another tweet from him later, after you sign the merger agreement, it simply doesn't matter if you believe you have enough information to evaluate its prospects as a business. You have agreed to buy it. That's on you, man. When someone responded about the potential for fraud, Levine responded again, they're not even saying that, even anonymously to friendly reporters. What they're saying is, oh, it's so hard for us to evaluate the business prospects. Entirely not a thing. If they had found fraud, they'd say things like, we found fraud.

Finally, one last quote from Matt Levine. To be clear, I'm not saying that the deal isn't in jeopardy. The market sure thinks it is. I'm just saying that this is all so stupid. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing and insurance on custodial assets. Learn more about NXO's reliable business model and start your crypto journey at nexo.io. That's N-EXO.I.O.

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and use referral code Breakdown to support the show. So what about the rest of Twitter? What do they think was going on? Well, the most common take, frankly, is that this was all applied to give Elon a reason, a cover, frankly, to sell $8.5 billion worth of Tesla shares in April. This was, of course, prior to the recalls of the Model 3 in May that sent the Tesla share price down 15% for the month. Lin Alden tweets Musk sold billions in Tesla stock after

initially announcing the Twitter acquisition plan, presumably to increase his liquidity for the deal. Will he be buying the Tesla shares back now that the deal is terminated, or nah? Lucifolda wrote, as predicted, having sold billions of overvalued Tesla shares under cover of this deal, its mission accomplished for Musk. Unless you think this is just Twitter chat, this Financial Times quote puts it pretty plainly. He sold $8.5 billion at $8.83 per share. At today's closing price of $752, he would have only received $7.2 billion. So he is better off by $1.3 billion so can pay the $1 billion breakup fee and still be ahead by $300 million plus offset the tax effects of the $1 billion loss. He also got free PR and was able to sell $8.5 billion worth

of Tesla without causing a much bigger crash if he had not had an excuse to sell. Now, the other take, of course, is that this is just such a clown show at this point as a whole. Lidquidity writes, so let me get this straight. Twitter originally fought against an Elon Musk takeover. Employees rage quit. Elon attempts to pull out of the deal. Twitter lawyers up to get Elon to close the deal. Absolute clown show all around.

Musk leaned into this type of analysis, by the way, meaming with the brain getting brighter in each panel as you theoretically get smarter meme. First, they said I couldn't buy Twitter. Then they wouldn't disclose bot info. Now they want to force me to buy Twitter in court. Now they have to disclose bot info in court. So what do I think? Honestly, I have no idea.

There's a big part of me that is like, why I spend any time on this? It's so absurd. But there are a couple of reasons I do within this framework of big picture power shifts. First, like it or not, Twitter is a hugely relevant social platform. Well, in fact, I think we sometimes overestimate its relevance in the crypto world, in that we fail to remember that there are a huge, huge number of market participants who don't live and breathe Bitcoin or crypto Twitter, there is no doubt how important the network is on global political discourse. And if it wasn't before, frankly, the ascension

of Trump thanks in part to Twitter definitely ensured that it will continue to be a force, at least in the foreseeable future. Second, the way that Elon uses Twitter is a new frontier in the expression of power and using public opinion as a part of business and political pursuits. Elon's huge number of followers on Twitter is an incredible weapon for him, so this is important from that dimension as well. Finally, there is another aspect of this conversation that is just more generally how extreme wealth tries to convert that extreme wealth into power more broadly. Being able to single-handedly buy one of the most important social networks in the world

is an example of that, and so while my heart resonates with Levine's assertion of this is all just so stupid, it still is really important to cover. As I was finishing this actually as a little bit of a denouement, Matt Levine came out with another piece about it, basically showing that there are three possible outcomes of the court case. The first is that they could agree with Musk and then allow him to terminate the deal without paying anything. The second is that they agree with Twitter that Musk is bound by his contract and then makes him pay $1 billion, which is the maximum available damages for breaching his contract. Levine argues that these are, for Musk's purposes, effectively the same.

Meanwhile, on the flip side, there is the possibility that the court agreed with Twitter that Musk is bound by his contract and then order specific performance, making him actually pay the $44 billion to buy Twitter. Here's how he sums up these sort of binary options. The possible outcomes of litigation are extremely terrible. Letting the world's richest person get out of a deal for a nominal fee because he got bored with it undermines the rule of law and the predictability of Delaware merger agreements. But forcing an unwilling buyer to own a big company with thousands of employees and an outsized

influence on politics and culture, seems bad for the buyer, the employees, the users, and the world. Nobody wants either of these outcomes. However, he notes these are the only available outcomes in court, not in the real world. He speculates then that this will come down to a settlement of one of two types, either Elon Musk buying Twitter for less than the $44 billion that he was going to have to pay, or Elon Musk walking away from the deal but for more than the $1 billion in the contract. He says, while these outcomes are still bad, they are better than the binary outcomes in court. And quote, I suppose it would be good if one of them happened. There will clearly be more of this psychodrama splashed all over the pages of business and tech news.

But before we wrap up, I want to do a little bit of a vibe check on both the crypto and macro side as we head into the rest of the upcoming news. On the crypto front, there was an interesting piece in Bloomberg from their Pulse survey of 950 investors that found that 60% thought that Bitcoin was more likely to go to 10,000 than to 30,000. The survey found retail investors to be more skeptical of crypto than institutional investors, with almost a quarter of retail respondents declaring the asset class to beat garbage. Of course, as you might imagine, results are extremely polarized. 20% of respondents say that crypto is worthless, while 28% say they have a strong confidence that cryptocurrencies were the future of finance. Bitcoin and Ethereum are basically the only thing this group of

investors has any sort of confidence in, and NFT sentiment was also pretty weak. An overwhelming majority of the respondents see them as merely, quote, art projects or status symbols, and only 9% of them saw NFTs as an investment opportunity. Now, these results aren't necessarily super surprising. It's a generalized set of investors, not just crypto investors, but Chris Berniske did a Twitter poll about the current market sentiment with presumably more of a focus on crypto investors, given who Chris is as an investor in the space. And he also found it to be really bearish. Only 17.2% of respondents to this Twitter poll thought the bottom is in. 26.4% said we'll retest the bottom. 39.3% by far the largest category said we're going lower. Still, Alex

Kruger wrote, most people out there with significant skin in the game believe capitulation is behind us. Yes, can always go lower, but the unwind is done. Meanwhile, on crypto Twitter, no way, price must drop another 80%. I think that's a pretty accurate sum up of of how things are feeling out there. What about on the macro side? Well, as I said, we've got the CPI report coming up this week. We've got continued energy issues in Europe. But one small interesting thing from the very end of last week

was the Bureau of Labor Studies jobs report for June, which came out on Friday. It showed a labor market that while cooling is still exceeding expectations. Employers added 372,000 jobs in June, which was only a small slowdown from the 384,000 jobs that were, added in May. This was much higher than the around 275,000 jobs that were expected. This data suggests that the labor market is still hot, and the most likely outcome, in most people's assessment at least, is that this will embolden the Fed to follow through with another 75 basis point hike at the FOMC meeting at the end of this month. The reason here is that one of the only things that could

potentially get the Fed off of their current course would be just a huge cratering in the jobs market. For now, with a Fed that seems intent to not lose this decade like its predecessors lost the 1970s by easing off too soon, it's full steam ahead with more QT and more rate hikes. All right, guys, as you can see, it is going to be something of a week. I'm looking forward to spending it with all of you. For now, I want to say thanks again to my sponsors, nexo.io, chain aliasis, FTCS at Ava Labs, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other.

Peace.