Massive news this morning as a new SEC filing confirms that Elon Musk is walking away from his proposed acquisition of Twitter.
The deal was estimated to be worth US$44 Billion but will no longer proceed. Musk had raised concerns over the validity of Twitter’s monatizable daily active user numbers, suggesting only around 5% of accounts were bots.
Musk strongly believes that the proportion of false and spam accounts included in the reported mDAU count is wildly higher than 5%.
In the filing to the SEC, it highlights that despite repeated requests over the past two months, Twitter has still failed to provide much of the data and information responsive to Mr. Musk’s repeated requests.
We understood Twitter would provide Musk with what is commonly known as the firehose, which is access to the stream of Tweets (this service is for sale) to enable him to run his own validation on spam accounts.
When Twitter finally provided access to the eight developer “APIs” first explicitly requested by Mr. Musk in the May 25 Letter, those APIs contained a rate limit lower than what Twitter provides to its largest enterprise customers.
There are 5 points to why Musk is terminating the deal.
1. Information related to Twitter’s process for auditing the inclusion of spam and fake accounts in mDAU. Twitter has still not provided much of the information specifically requested by Mr. Musk in Sections 1.01-1.03 of the May 19 diligence request list that is necessary for him to make an assessment of the prevalence of false or spam accounts on its website. As recently as the June 29 Letter, Mr. Musk reiterated this long-standing request for information related to Twitter’s sampling process for detecting fake accounts. The June 29 Letter identified specific data necessary to enable Mr. Musk to independently verify Twitter’s representations regarding the number of mDAU on its platform—including, but not limited to (1) daily global mDAU data since October 1, 2020; (2) information regarding the sampling population for mDAU, including whether the mDAU population used for auditing spam and false accounts is the same mDAU population used for quarterly reporting; (3) outputs of each step of the sampling process for each day during the weeks of January 30, 2022 and June 19, 2022; (4) documentation or other guidance provided to contractor agents used for auditing mDAU samples; (5) information regarding the user interface of Twitter’s ADAP tool and any internal tools used by the contractor agents; and (6) mDAU audit sampling information, including anonymized information identifying the contractor agents and Quality Analyst that reviewed each sampled account, the designation given by each contractor agent and Quality Analyst, and the current status of any accounts labelled “compromised.” A subsequent request along these lines should not have been necessary, as this information should have been provided in response to Mr. Musk’s original diligence request. Yet, to date, Twitter has not provided any of this information.
2. Information related to Twitter’s process for identifying and suspending spam and fake accounts. In addition to information regarding Twitter’s mDAU audits, the June 29 Letter also reiterated requests for data specifically identified in Sections 1.04-1.05 of the May 19 diligence request list regarding Twitter’s methodology and performance data relating to identification and suspension of spam and false accounts, including, but not limited to, information regarding account suspensions, including information sufficient to identify daily numbers of account suspensions since October 2020 and numbers of account suspensions for each of Twitter’s internal reasons for suspension. In addition, during the June 30, 2022 call, Twitter’s representatives indicated for the first time that the workflow and processes for detecting spam and false accounts in the mDAU population is different and separate from the workflow and processes for identifying and suspending accounts in violation of Twitter’s policies. On that call, Twitter indicated that it would not be willing to provide information regarding the methodologies employed to identify and suspend such accounts.
3. Daily measures of mDAU for the past eight (8) quarters. On June 17, 2022 (the “June 17 Letter”) Mr. Musk reiterated his request for “access to the sample set used and calculations performed, as well as any related reports or analysis, to support Twitter’s representation that fewer than 5% of its mDAUs are false or spam account.” To that end, Mr. Musk requested that Twitter provide “daily measures of mDAU for the previous eight quarters, and through the present.” This information is derivative of the information Mr. Musk first sought in Sections 1.01-1.03 of the May 19 diligence request list. Although Twitter has provided certain summary data regarding the mDAU calculations, Twitter has not provided the complete daily measures as requested.
4. Board materials related to Twitter’s mDAU calculations. In the June 17 Letter, Mr. Musk requested a variety of board materials and communications related to Twitter’s mDAU metric, its calculation of the number of spam and false accounts, its disclosure of the mDAU metric, and the company’s disclosure of the number of spam accounts on the platform. Twitter has provided an incomplete data set in response to this request, and has not provided information sufficient to enable Mr. Musk to make an independent assessment of Twitter’s board and management’s understanding of its mDAU metric.
5. Materials related to Twitter’s financial condition. Mr. Musk is entitled, under Section 6.4 of the Merger Agreement to “all information concerning the business … of the Company … for any reasonable business purpose related to the consummation of the transactions” and under Section 6.11 of the Merger Agreement, to information “reasonably requested” in connection with his efforts to secure the debt financing necessary to consummate the transaction. To that end, Mr. Musk requested on June 17 a variety of board materials, including a working, bottoms-up financial model for 2022, a budget for 2022, an updated draft plan or budget, and a working copy of Goldman Sachs’ valuation model underlying its fairness opinion. Twitter has provided only a pdf copy of Goldman Sachs’ final Board presentation.
The value of Twitter, like many online companies, is ultimately worth a multiple of active users. If the bot / spam account problem is actually much larger than Twitter admits, the valuation should be lower.
Bots and spam accounts are not an isolated issue for Twitter. As an industry, we should have a standard algorithm for determining what is a real human account and ultimately how many people could be monetised on a given platform.
It looks like Twitter’s board will fight this.
Musk argues that Twitter is in breach of the Merger Agreement, ultimately the courts will decide, but there are a few different potential outcomes.
- Court finds Twitter didn’t breach the agreement and Musk will be forced to pay around $1Bil to terminate the agreement (+legal fees)
- Court finds Twitter did breach the agreement by failing to provide the acquirer (X Holdings I and X Holdings II) and Musk walks away and embarks on building a competitive service.
- Court upholds the deal and forces the deal to proceed.
- The price is re-negotiated and the deal continues (most unlikely)
It seems we have a long way to go on this saga. Let us know your thoughts in the comments.
