In this episode, Michael Byrd and Brad Adatto discuss the M&A side of the Twitter vs. Elon Musk. Tune in as we discuss the different phases of M&A deals, when a deal is considered “done”, and trends in today’s M&A market.
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at email@example.com.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues, simplified through real client stories and real world experiences. Creating simplicity in 3, 2, 1.
Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my co-host Michael Byrd.
Michael: Thanks Brad. As a business and healthcare law firm, we meet a lot of interesting people and learn their amazing stories. As you know, this season, we are spicing things up a bit.
Brad: Yes, we are.
Michael: We are here to talk about OPP, other people’s problems.
Brad: Michael, for those listening for the first time this season, tell them what we’re doing with OPP.
Michael: Well, instead of telling client stories that we’ve experienced and taking names out, we’re telling public stories that are in the news, and we are gonna then use those stories to glean some legal lessons that are hopefully very digestible for our audience.
Brad: Excellent, Michael, well, before we get into today’s OPP story, I’m gonna ask you a question. [00:01:00] I think I know this to be true. You do own an iPhone, correct?
Michael: Yes, Brad, I don’t think that qualifies as a humble brag anymore either since I think almost the entire world owns an iPhone.
Brad: Okay. Well, so, because you own an iPhone, you might have these things called apps, social media apps to be precise, like Facebook, YouTube, Instagram, TikTok, Snapchat, or even Twitter.
Michael: I have lots of kids, so translation Facebook’s for old people. Yes, I have that. YouTube, of course. I have adopted YouTube. It’s been around for a long time. Instagram, same. Family pictures and work social media. Now you start getting into TikTok and Snapchat and that’s outside of my league. Twitter believe it or not, I actually use that for, getting the news.
Brad: Okay. So since we established that you’re some type of social media tycoon with your Facebook account,
Michael: And [00:02:00] Twitter, and I have a TikTok account.
Brad: Alright, well, so great. This makes it life easier, because I’m gonna do another thing that you love the best. I have another quiz for you today. This one is gonna be on these different platforms. Are you ready?
Michael: This is like back a few seasons ago when you just talked about old movies every time. Now, it’s I’m gonna quiz Michael every time.
Brad: It’s so much fun because it really shows your intelligence or audience members, lack thereof. Alright. Michael, how many active users does Facebook have on a given month?
Michael: 60 billion?
Brad: Wow. That’s really close. However, audience members, he’s wrong. Monthly active users is 2.9 billion. Alright, so you’re quite a little off.
Michael: At least I was in the billions.
Brad: Yes. You were correct in that one. I’ll give you the B, correct. Okay. Next question. How many active users does YouTube have on a given month?
Michael: 60 billion?
Brad: Still a little high, Michael, but I appreciate your excitement when you answer [00:03:00] it incorrectly again. No, 2 billion is what they have in a given month. So let’s try one more. You say you have Instagram, so on Instagram, how many active monthly users are there?
Michael: 60 billion.
Brad: Again, too high.
Michael: Oh, I’m just trying to be assertive and confident.
Brad: Riley, he looks assertive, doesn’t he? Yeah, she’s nodding your head, audience members. Okay. Monthly active users for Instagram is 1.3 billion. You say you’re not that familiar with TikTok because you’re an old man. How many do you think are on TikTok and you cannot say 60 billion?
Michael: 61 billion.
Brad: No, Michael, not 61 billion. It’s actually, TikTok monthly averages, 1 billion. Alright. Last one, I promise, how many monthly active users are on Twitter in a given month?
Michael: Oh, Brad. I almost want to give up. I’m gonna say 1 billion.
Brad: Okay. Well, at least you came down off the 60 to [00:04:00] 61 and actually, unfortunately you’re all wrong again. It’s about 400 million people that use that particular social media platform.
Michael: Okay. I’m just begging you to stop Brad.
Michael: What does all this monthly active user quiz have to do with today?
Brad: Alright. I thought you had never asked. So, let’s keep going down this rabbit hole with me. It’s interesting, when you start looking at statistics of how social media platforms are utilized. Nine out of every ten people buy from brands that they file on social media so, audience members, please follow us on social media. 73.5% of the internet users follow research brands and products on social media and 79% of the people say user generated content highly impacts their buying decisions.
Michael: Did you learn this in marketing school, Brad?
Brad: It was actually a marketing website that Siri had told me about. So this helps justify the company’s super rich valuations, because the promises [00:05:00] that these platforms will allow advertisers to obviously tap into their massive user bases so more people, more eyeballs, which allows ’em to make money in the future.
Michael: Yeah, we somewhat touched on this when we’ve had Silicon Valley talk where it’s not necessarily the dollar that affects value here, it’s the larger, the number of users, the more valuable the company.
Brad: Yeah so the stock on those social media platforms are traded based on many different factors, but the numbers of users on that platform is a big deal.
Michael: Alright. Well, they would’ve been really valuable if their numbers would’ve matched my guesses.
Brad: Yes, any people from the Facebook accounts and whatnot really want to have the 61 billion that you said. So Michael, how many users does Twitter have on a given month?
Michael: A,I thought we were done. B, I’m gonna go back to my litigation days and say, objection, asked and answered. You’ve already asked me that exact question. [00:06:00]
Brad: That’s correct. I did even give you the answer, which is 400 million. The problem is if someone cannot verify the actual real people in the platform versus bots, which that can be a pretty big, huge issue, Michael, and that brings us to today’s OPP story. Alright, Michael. So today we have the world’s richest man. He is known is a co-founder and CEO of Tesla. His name is Elon Musk.
Brad: Yeah. I don’t know if you’ve heard of him. His net worth has been as high as $330 billion. Now it’s fluctuated to about $278.4 billion and for context purposes…
Michael: You know, I love context.
Brad: You do like context. The second richest man in the world is the founder of something called Amazon. His name is Jeff Bezos and he’s only worth $165 billion, which is about a hundred billion dollar difference between him and Elon. In case you didn’t know, Elon also likes [00:07:00] tweeting on this thing called Twitter. He owns about 9% of Twitter making him the largest shareholder of the company and as some of the audience members probably have started to catch on in April of 2022, Elon, wanted to own all of Twitter.
Michael: Well, if we were a family law firm, we could have done a story on Jeff Bezos and him getting divorced cause that cost him being in competition with, Elon for world’s richest, man it’s but I digress.
Brad: Yeah, you did.
Michael: If I remember correctly going back to Elon Musk, he offered over $40 billion to buy Twitter and, I guess to say he offered it is almost an understatement. If I remember, right, he actually tweeted that he made an offer to the board of directors.
Brad: You’re actually correct in both, which has been unusual for this episode so far.
Michael: True, getting my confidence back.
Brad: There you go. On April 14th, 2022, Elon Musk offered to buy Twitter for 54 dollars and 20 cents per share value of [00:08:00] the company valuing it about $43 billion. According to the security filings, the offer amounted to basically a premium of about 38% of the price when Elon bought 9% of the company and before it took public. So it’s a big jump, basic in valuation.
Michael: If I remember correctly, didn’t Twitter, try and prevent Elon from acquiring it. I seem to remember them talking about a poison pill that would allow the current stockholders to purchase additional shares at a discounted price and really it was all just a bunch of gyrations to block Elon for being able to pull this off.
Brad: Again, Michael you’re actually on roll, Riley, we gotta get that blue ribbon out for him. Yeah, it is correct again, Michael. Twitter did try to find some way to basically prevent Elon from buying the entire company. There was a lot of back and forth, but eventually, they did eventually agree that they would sell to Elon and once the [00:09:00] deal was agreed that he would buy it, in typical Elon fashion, after the board accepted his offer, he then sent out a tweet, saying next I’m buying Coca-Cola to put the cocaine back in it.
Michael: Well, that escalated quickly and very on brand for him to shoot that tweet out. Well, as we’ve discussed in other shows, now that the parties agreed to the deal, it does not mean that the deal is done and anybody that’s watching the news probably is aware of that. Typically the next step after you have this deal is the due diligence phase.
Brad: Yes, Michael, and you used probably the first vocabulary word besides billionaire. I don’t even know if we can define that one but’s it’s a lot. You said due diligence, maybe you can tell our audience, what does due diligence mean?
Michael: Well, the layman’s term is it’s kind of the proctology exam that happens after you have a deal, [00:10:00] and not a great visual there, but it is…
Brad: Yeah. Thanks, Michael.
Michael: …very on par with what the experience is like, and it’s the buyer of the company wanting to, at that point, make sure what they think they’re buying is what they’re actually buying. What that really means is comprehensive investigation and appraisal of the business by the buyer. They’re looking at the business structure, the assets, the liabilities, they’re looking at legal compliance, they’re looking at the operations both past and current, they’re looking at, obviously the potential from a commercial perspective for the business and, the due diligence stage where the buyers can find leverage to renegotiate the deal or if things are bad enough back out entirely and for sellers, this is the time to show the buyer that everything is in order and that everything that they think that buyer thinks they’re getting is, is as is, and [00:11:00] that the records kind of support the deal.
Brad: That’s right! Good job, Michael. Yeah, and so for today’s OPP story, this is the phase where we call “what their wheels just start coming off the deal”.
Michael: Yes, Brad, that is true! At the opening of the show when you were making me feel bad because I couldn’t get the numbers right…
Brad: 60 billion.
Michael: …We were talking a lot about monthly users and the value each user can provide to a social media platform. And then you asked me the bot question earlier, which was not fair and by the way he didn’t even tell anybody what a bot is.
Brad: Where is a bot, Michael?
Michael: You’re the one that said it, not me. Sounds technical.
Brad: It is. It’s very technical.
Michael: That actually is the reason that Elon pulled out of the Twitter deal.
Brad: Yeah. And for audience members that don’t know what bots are, bots are basically robots meaning that something is fake and is not a real person. So remember going back, having eyeballs, [00:12:00] if you’re having a bot, that just means its computer generated. Account versus an actual real account, and so that really…
Michael: Like your girlfriend from high school.
Brad: She was real! She was just hanging out with your girlfriend, Niagara Falls.
Michael: Oh, okay. Let’s move on.
Brad: So let’s go back to the real question, it really started coming back while this was going on, almost a month after making this offer. Elon, Mr. Musk, who likes to tweet, started tweeting out that this deal to buy Twitter’s temporary hold, citing concerns of what he was saying was the prevailing amount of bots and spam on the, the platform. Along with this tweet, Musk posted an R’s report. In a public filing that Twitter earlier had in May said that the fake accounts may be up, up less than 5% of the actual users on this platform. Meaning that 5% of users are just fake accounts. This bird must demand details supporting the calculation that this, [00:13:00] these about these FA fake accounts, to really figure out who are the, the number. Of actual human beings who are Twitter users, basically, for the first time he was noting that he’s worried about these fake accounts.
Michael: Yeah. Let me say this back to you to make sure I’m following it, but he’s basically saying, Hey, Twitter made this public filing that said less than 5% of our users are fake because they’re these bots and he sets that as the bar in his due diligence phase to say, if it’s greater than that, then we’ve got a problem.
Brad: You got it!
Michael: Yeah! So, I read that many people thought that this was in fact, a tactic for Elon to bargain for a lower price for the acquisition or even abandon the effort altogether.
Brad: Yeah and it could have been. Actually, I read a whole bunch of articles when we were preparing for this and another one talked about when he made the offer, he also sold a huge portion of Tesla and maybe he was using that as a [00:14:00] means that may not make people panic as to why is he selling so much?
Michael: Oh, wow.
Brad: Of Tesla. So, yeah, there’s a lot of theories out there, but, let’s stay with this particular story and thread is that, you know, the weeks kept progressing while the deal was on home, and then musk kept threatening Twitter that if they didn’t provide this additional information that he needed to really determine the bots, he might walk the deal. Now Twitter kept saying, well, hey, we’re acting in accordance with the terms, the merger agreement, which means no. And then just send basically all via tweets. You know, I’m gonna walk away from this deal because you guys are in breach of it. You’re not providing me with the data that I need, and I can’t really evaluate this investment. And, so Twitter finally said fine, we’ll hand over, and this is my favorite part of it. They handed over a fire hose, air quoting that as data.
Michael: Well, I mean, that would seem [00:15:00] Promising that they finally relented and gave him what he was asking for so that he could verify, so that he would have all the data that he was asking for.
Brad: Yes. And as some lawyers know, sometimes getting the term document dump is really not as great as it sounds.
Michael: Hmm. Needle in a haystack.
Brad: Yes. And so, according to Musk attorneys when they started going through they released the statement saying, Hey, we’ve been asking for stuff for months and we’re trying to get this data that’s necessary for us to really evaluate from independent assessment in the due diligence, as you were talking about is how many fake or spam accounts does this Twitter platform have? And they said this, we just can’t figure it out, that it isn’t Fundamental to us as to what is the true value of Twitter’s business from a financial perspective. If we can’t figure this out, we can’t close this deal that we contemplated originally from these two parties.
Michael: Yeah. And Twitter has repeatedly said [00:16:00] that it has cooperatively shared information with Musk in order to close the deal at the originally agreed upon terms. Many experts believe Elon was setting up the use of a $1 billion breakup fee in the event that this fell through, of course, or trying to just get out of it together.
Brad: All possibilities. And so, fast forward to July 8th, Elon tells Twitter, also via tweet that he’s killing the deal. Twitter tells Elon, Hey, no, take backs, you have to buy us for 44 billion. You offered it even though the company’s valuation has actually at this point decreased dramatically.
Michael: Well, I know Brad, that we’re pretty simple as attorneys, but I’m pretty sure there’s not a legal theory out there called no, take backs.
Brad: Probably correct again, today you’re on a roll. Well, what Twitter actually said to Elon was, hey, this is a breach of the agreement. You cannot terminate this deal based on [00:17:00] what you’re referencing, and we’re gonna go to the judge, which audience members, you probably know they did. And we’re gonna force you to buy us at the asking price or at the price we agreed to.
Michael: Well, we’re all getting to watch this play out in real time. Most of it on Twitter.
Michael: And it is a constantly evolving case, and probably, the story is who knows how far it’s been written so far, but let’s hit the pause button. Let’s go into commercial. And on the other side, let’s take this very public story and all the stuff that’s usually private coming out on Twitter and talk about how in real time that actually affects and impacts deals that people that we see all the time.
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Brad: Welcome back to legal 123s with ByrdAdatto. I’m your host Byrd Adatto with my co-host Michael Byrd. Now, Michael, this season, our theme is O-PPP. We just walked through a very public offering of a company being acquired by… actually in this case, one of their shareholders. Since, you know, audience members, that you’ll probably know we’re not litigators, so we’re not gonna concentrate on the actual trial at hand or the litigation and all the filings going back and forth. And as to what’s happened, since then, to us, it’s really a reflection. Michael, looking back at this real public offering to buy a company. And [00:19:00] then what happened?
Michael: Yeah. I mean, our clients are closely held private companies, and so the typical phases of an M and A deal are private, and, you know, we’ve done episodes where we talk about what an M and A deal can look like but this. In real time on Twitter, we can show you the due diligence happening in the back and forth fight that’s happening. And I don’t know, maybe I just need to start tweeting in real time about you whenever, we’re running the law firm, just so I can keep it real.
Brad: Yeah, that’s great. I mean, these deals, typically they’re unpacked between lawyers and business people via emails and calls and zoom meetings. They don’t happen in the public sphere, especially with these closely held private companies. I mean, you’ll enter into something called a letter intent and part of that letter intent, there’s certain binding aspects as LOI. And part of that is to keep the deal private. [00:20:00]
Michael: And, you know, you said LOI or letter intent for our audience that does not know a letter intent or an LOI is a document which outlines kind of the key aspects of a potential deal. What is each party looking for? How the deal should be structured? The lawyers call ’em the material terms, but you know, it’s the bones of why are you doing this deal? And you’ll sometimes see ’em called a memorandum of understanding or even a confidential term summary, But you routinely see that the idea of it being confidential. And then the other idea is that these are the big points of the structure of what’s gonna be happening. You’re trying to set expectations, and make sure you’re on the same page before you spend the time and energy that it would take to close a deal. And so we actually talked about this during red flag season. We had an episode on non-binding [00:21:00] letters of intent and that that otherwise can be deceptive. And actually, there are actually binding clauses. In a non-binding letter of intent.
Brad: Yeah. And a really good LOI, audience members, it should be modeling out all the extremely important aspects of the deal that are important to you. What are those financial terms? What is that structure gonna look like? What type of post-sale handcuffs, like, covenants not compete, and notation will be in it. What are the expectations and timeframes that you plan to go through with your due diligence?
Michael: Yeah, and let’s focus on that. The due diligence expectations set in LOI are so critical and it’s such an important step in the M and A deal. It’s the point in time where you can actually figure out if reality matches what you think it is in the offer sheet, and we’ve done plenty of episodes [00:22:00] on the we’ve gotta hurry up and close type of concept where the due diligence is skipped because it’s gotta happen fast. And they obviously made the podcast episode because something went terribly wrong. There are probably sometimes that it does work out, but your risk escalates. If you don’t look and see what you’re actually buying, you’re the buyer
Brad: Yes. I completely agree. I would never recommend, if you can waving your M and A portion of a deal, this is the whole part of the deal where it’s the whole concept, you know, when somebody says, well, why do I have to do this? You’re like, well, I trust you, but I’d like to verify that too. So trust, but verify. And as you mentioned in other shows, this is really that moment where we’ve talked about where the seller really needs to open up their underwear drawers and really show the buyer everything. In this case with Elon, he kept asking I need to figure out how much y’all really think of bots versus humans, because I’m putting a price tag on it. [00:23:00] So while negotiating an LOI, the parties really need to step back and build this into the LII, and as to what’s the expectation of delivery, what’s the timeframe they want. When do you wanna start, the due dealers phase, when you wanna complete it, or, are there ways to extend it if you know, so all those are kind of things.
Michael: What’s the timeframe on due diligence? What does that usually look like?
Brad: Yeah. You were talking, you know, it really depends on the deal and what’s happening at the speed. But at the minimum, it’s 30 days, as the attorneys, we like to, you know, push it out to 120 days. It doesn’t mean it takes that entire time, but your typical deal, you probably see around 90 days and clearly as a seller. You normally push it as fast as possible, because you’re ready to sell. Sometimes, as you know, the buyer wants to do the same thing, because you’re ready to move forward, but as a buyer, you should wanna be at a request time because you wanna make sure that you’re gonna get all the information that you need during this stage to make sure that you have what you need to say. This price is good.
Michael: Yeah. I mean, and if you run out of time, you can ask for more time. Now the [00:24:00] risk is that the other party, won’t allow it, and then forces your hand to make the deal not happen. Depending on the letter of intent says in these deals, there’s consequences. In Elon’s case, it’s a potentially $1 billion consequence. Of course, they want the no-take back strategy. So it might be a 44 or a $43 billion consequence.
Brad: Yeah, that’s correct. During this due diligence phase, the seller really discloses. If they, don’t really seem to be adequate, like, Hey, I’m not, and they’re dodging what they’re being asked to give. They’re not really. You keep asking for the same information that they’re not gonna give you, and that’s really typical for this type of transaction, you need that you, the buyer, in a good LOI, you’re not gonna have any obligations to follow through it with the steel.
Michael: So what could the buyer do besides request more time? If they’re not getting the information they…
Brad: So obviously if a seller won’t provide that information you requested and they seem to be hiding certain pertinent facts, this could be a material breach of an LOI. The buyer typically has options of number one, just terminating the deal, just walking away, or they could make a different offer. Normally lowering the price. Or they can move forward. Understanding there’s a risk associated with this. It’s higher than they actually anticipated because they actually don’t have all the information. They need to really make informed decisions. But typically the buyer will be well within their rights to terminate and demand the return of a good faith deposit. If they’re not, if the seller will not turn over the information being request.
Michael: And talk about the breakup fee.
Brad: Yeah. So some of these Elon deals, a perfect example is that if you walk away with not real good reason, you’re gonna have to pay a breakup fee, and in this case, if you’re like, well, I’m breaking up because you won’t give me the information I need, that should be voided.[00:26:00] Again, you know, that depends on how it’s negotiated, but if you’re not negotiating good faith, if you won’t gimme the information, I wanna walk away and I want my money back because you were never intended to give me the information I needed to make sure that the worth I’m providing is, is correct. Michael, you know, we’re almost out of time today. So tell me some of your final thoughts.
Michael: Well, I think what’s really cool about the Elon story as it, as it relates to what the points we’re trying to make on an M and A deal as you started this episode, very mainly picking on me and asking questions. I had no way to answer because you wouldn’t let me talk to Siri, but you made an illustration about how valuable the number of users are to the value of these companies. So when you’re talking about bots, which kind of, you know, doesn’t sound like that big of a deal, it’s a huge deal. If you know what the value of the company is [00:27:00] based on the number of users half of ’em are fake or however many of ’em are fake. More then what they thought. So that’s why, again, Elon set the stage at, well, you said, it’s less than 5%. So anything more than that is something that’s would theoretically significantly impact the value and kind of taking that concept, understanding that when you’re doing a deal. So if you’re a medical practice, there may be things in your numbers, yeah. That you try to dress up to look really good and due diligence, you know, they’re gonna do, kind of a quality of earnings analysis. And C is this real? Is this real or is it. Not real. And, in healthcare you see all sorts of issues. We’ve heard of the, you know, pump and dump, the blow-up, the value, the practice and how those can go wrong. So it’s, it’s important to understand that, there’s so much [00:28:00] to, Understand to gain from the, from the due diligence, you really want to focus on looking at those things to impact the value of what you’re buying.
Brad: Yeah, I totally agree and that goes back to something we always talk about is the value. If you’re the buyer, you wanna prove the fact that you’ve got everything and if you refuse to turn stuff over, sorry. If you want them to prove that it’s worth, and if the seller won’t give you the information you need. That’s problematic. If you’re getting ready to go to market, you need to be prepared, to go back and clean up your house, you know, get your house in order. If you don’t think your numbers look good or you don’t think you have some compliance concerns or structural concerns. Now we’ve talked about that in other episodes, but yeah. Getting your house in orders is so critical, before you go to market.
Michael: Totally agree.
Brad: Well, audience members that is all the time we have today, but we’ll be back next Wednesday where our, our OPP story will have discussed 300 million reasons why the federal government likes using [00:29:00] wiretaps. We’ll bring on our good friend and white collar attorney, Sarah Wirskye to help us break it down.
Outro: Thanks again for joining us today and remember, if you like this episode, please subscribe. Make sure to give us a five star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at ByrdAdatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney, client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.