Increasingly Unlikely Musk Will Be Allowed To Terminate Twitter Deal (NYSE:TWTR)

I missed the beginning of the ~4-hour-long Tuesday hearing in the Elon Musk/Twitter (NYSE:TWTR) case. Luckily, the first few hours seemed like a snoozefest for purposes of merger speculation. The last part turned out to be fireworks. Twitter brought more evidence that put Team Musk on the back foot and it increasingly looks unlikely Musk will be able to get away from the Twitter deal or even finagle a couple of bucks per share from its shareholders.

Please keep in mind my observations are biased as a Twitter shareholder and my understanding of applicable law (or any law really) is that of a layman. There are several lawyers involved on both sides, and even for Morgan Stanley (MS). I’ll just refer to sides as Team Musk, Team Twitter and Team MS (although I’m going to leave them out of this).

My general observation is that Team Musk tried to spend a lot of time on unimportant issues, so there wasn’t much time left for the part where they were facing the more severe challenges to their case. It also appeared to me Team Musk seeks broad discovery when possible (that’s something I view as a risk from a speculator’s point of view).

In my opinion, Team Musk’s breaking off the merger contract is potentially based on a suspect premise. His side can’t really break the merger contract given how the facts stand (in my view). So, their strategy could be to break the merger in order to fish for reasons that would allow them to break it in the discovery process. Of course, Team Musk doesn’t share this view.

Some specific things that I found very interesting from a merger-arb perspective are the following:

Team Musk appears to have been slow-rolling Twitter’s discovery of communications between team Musk and hired data scientists (hired to prove there are way too many bots at Twitter).

Coincidentally, these communications appear to be fairly undermining to Musk’s side of the case. Publicly he’s been complaining about the enormous amounts of bots on Twitter. Meanwhile, he seems to have hired more than three data scientist firms, and they appear to have come up with assessments of fake users like:

• 80% confidence interval of 11% fake user number
• 90% confidence interval of 5.2% fake user number

The above aren’t exact quotes, but basically, it comes down to numbers that are ballpark within the realm of what Twitter has been reporting in its public filings.

At the same time, at this hearing, Team Musk seemed to have shifted away from arguing obsessively about the mDAU number and started talking about other metrics.

It seemed farfetched to me. But I don’t buy into the mDAU narrative, to begin with. I’m of the opinion that Musk is unlikely to be allowed to terminate the merger over that number anyway, even if Twitter reported numbers were indeed completely off. I explained this more in-depth in this article here:

However, the way I see it; Twitter’s revenue and profit are Twitter’s revenue and profit. The profit/revenue numbers are the numbers whether there were ten thousand fake accounts or a billion fake accounts. I could even argue Musk is making a better deal the more the number of fake accounts is being understated. After all, that leaves him with a larger total addressable market and Twitter is able to generate its revenue of a smaller number of users which means higher ARPU.

In the later part of the hearing, something interesting came to light. It seems like Musk and Birchall (an advisor) have claimed they didn’t use Signal (a messaging app) much and did not use it to talk about the merger.

Twitter surfaced “proof” Musk and Birchall used Signal to communicate about the merger. In my view, this implies team Musk is not exactly on top of preserving communications. Potentially, they have withheld communications from Twitter in discovery where they shouldn’t have.

In my opinion, this appearance is bad for Team Musk (whether justified or not). If there’s enough of a pattern suggesting a party is mucking up evidence, it’s my understanding, there’s legal precedent for the judge to assume this potentially disadvantageous evidence does exist (whether it ever existed or not).

In a previous article, I’ve already written about Team Musk flying close to the sun in a similar respect. I would not be surprised if the judge is going to put some kind of remedy in place, given the picture that’s developing on Team Musk’s handling of their end of discovery.

Twitter went up 2.8% yesterday. I think it was up close to 1% before the later part of the hearing. It’s now back to $42.50. Given the way this hearing went, I think Twitter should have been up 4%-5% at least. I also continue to be of the opinion that the spread to the deal price at $54.20 is too wide. That still leaves about 26% of upside with less than a month to go until trial. Admittedly, Twitter likely drops to ~$20 if Musk, by some miracle, walks away from this deal.

Given my understanding of the facts, I expect this deal to close with a high likelihood at the deal price. There’s a chance Musk gets a small discount out of the board (it has happened in other bad cases). I guess there must be a chance Musk walks but I put the odds of that at 5% or less. Overall, I like this merger a lot and I’ve added to my position as high as $43.10 after the close yesterday.