Elon Musk Terminates Twitter Purchase Deal, Citing Material Breach of Agreement by Company Refusing to Provide Access to Data
from The Conservative Treehouse:
Elon Musk has notified Twitter and the SEC [SEE LETTER HERE] that he is exercising his “right to terminate the merger agreement and abandon the transaction contemplated” due to the social media company not providing transparent access to background data that would allow authentication of “monetized daily active users” (mDAUs).
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It appears that Twitter Inc did not want to reveal how Jack’s Magic Coffee Shop was able to sustain operations, at an extremely high cost, without making money. That’s the essential source of the issue.
The social media company did not want anyone looking at the data stream inside the communication platform. Musk was not allowed to authenticate the number of real users and identify the number of ‘spam’ or ‘bot’ accounts within the platform.
From the SEC Letter: […] ” Specifically, in the Merger Agreement, Twitter represented that no documents that Twitter filed with the U.S. Securities and Exchange Commission since January 1, 2022, included any “untrue statement of a material fact” (Section 4.6(a)). Twitter has repeatedly made statements in such filings regarding the portion of its mDAUs that are false or spam, including statements that: “We have performed an internal review of a sample of accounts and estimate that the average of false or spam accounts during the first quarter of 2022 represented fewer than 5% of our mDAU during the quarter,” and “After we determine an account is spam, malicious automation, or fake, we stop counting it in our mDAU, or other related metrics.”
Mr. Musk relied on this representation in the Merger Agreement (and Twitter’s numerous public statements regarding false and spam accounts in its publicly filed SEC documents) when agreeing to enter into the Merger Agreement. Mr. Musk has the right to seek rescission of the Merger Agreement in the event these material representations are determined to be false.
Although Twitter has not yet provided complete information to Mr. Musk that would enable him to do a complete and comprehensive review of spam and fake accounts on Twitter’s platform, he has been able to partially and preliminarily analyze the accuracy of Twitter’s disclosure regarding its mDAU. While this analysis remains ongoing, all indications suggest that several of Twitter’s public disclosures regarding its mDAUs are either false or materially misleading.
First, although Twitter has consistently represented in securities filings that “fewer than 5%” of its mDAU are false or spam accounts, based on the information provided by Twitter to date, it appears that Twitter is dramatically understating the proportion of spam and false accounts represented in its mDAU count. Preliminary analysis by Mr. Musk’s advisors of the information provided by Twitter to date causes Mr. Musk to strongly believe that the proportion of false and spam accounts included in the reported mDAU count is wildly higher than 5%.
Second, Twitter’s disclosure that it ceases to count fake or spam users in its mDAU when it determines that those users are fake appears to be false. Instead, we understand, based on Twitter’s representations during a June 30, 2022 call with us, that Twitter includes accounts that have been suspended—and thus are known to be fake or spam—in its quarterly mDAU count even when it is aware that the suspended accounts were included in mDAU for that quarter.
Last, Twitter has represented that it is “continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our mDAU…” But, Twitter’s process for calculating its mDAU, and the percentage of mDAU comprised of non-monetizable spam accounts, appears to be arbitrary and ad hoc. Disclosing that Twitter has a reasoned process for calculating mDAU when the opposite is true would be false and misleading. (more)
In April of this year the social media company Twitter said revenue for the first quarter totaled $1.2 billion (+16%). However, costs and expenses totaled $1.33 billion (+35%), resulting in an operating loss of $128 million (link). Another unsustainable financial result for a company that doesn’t make a dime in profit, yet it continues to operate.
The metaphorical Jack had a great idea, open a coffee shop where the beverages were free and use internal advertising as the income subsidy to operate the business. Crowds came for the free coffee, comfy couches, fellowship, conversation and enjoyment.
