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Billionaire Elon Musk had plans to acquire Twitter for $44 billion, but has put the deal on hold. Chris Delmas/AFP via Getty Images

Why Musk may have to pay $1 billion if he abandons Twitter acquisition

Janet Nguyen Jun 8, 2022
Billionaire Elon Musk had plans to acquire Twitter for $44 billion, but has put the deal on hold. Chris Delmas/AFP via Getty Images

Billionaire Elon Musk put his $44 billion deal with Twitter on hold last month after demanding the social media platform reveal exactly how many of its users are bots and spam accounts. In a letter sent to Twitter, his lawyers say Musk has the right to terminate the deal if the company fails to provide this information. 

Musk claimed (on Twitter) that the number of fake accounts could total 20%, quadruple what Twitter has said to date. 

Experts think the CEO of Tesla isn’t so worried about the integrity of that data, and is instead dealing with a case of cold feet after Twitter’s stock prices recently plunged as part of a shake-up in tech stocks. When Musk announced his offer, Twitter stock stood at $54.20 per share; it’s since fallen to roughly $40. 

Whatever the reason, the reluctance comes with a $1 billion price tag. This is what’s called a breakup fee, a fee designed to prevent deals from falling apart.

Most acquisition agreements have two different breakup fees: a regular breakup fee paid by the seller, or the target, to the buyer (typically paid if the seller gets a better offer) and a reverse break-up fee, the type of fee Musk would have to pay. These are paid by the buyer, explained Afra Afsharipour, a senior associate dean for academic affairs and a professor at the University of California, Davis School of Law. 

“It essentially allows the buyer to terminate the deal under certain conditions,” Afsharipour said, adding that she thinks Musk will have a hard time walking away from the deal without paying one. 

The argument outlined in the letter sent by Musk’s lawyers is the only valid argument he has, Afsharipour said. According to a report today from The Washington Post, Twitter plans to comply with Musk’s requests and could provide the information as soon as this week.

Even if Twitter declined to provide the information, Afsharipour said, the bot argument may not stand up in court. 

“Partly because this is not a new thing that he didn’t know anything about. He’s been an active user, he’s been talking about this for a long time,” Afsharipour said. “He explicitly waived doing due diligence on Twitter in connection with a transaction.” 

Afsharipour said that your typical breakup fee, or the amount paid by the target to the buyer, stands at roughly 2.8%, and that it’s rare to have a termination fee that’s more than 5% of the value of the deal. Reverse termination fees are typically larger — Afsharipour has seen those go as high as 6%. At about 2.2%, the reverse termination fee in the Musk-Twitter deal is relatively small. And if talks between the parties resume, that fee may not end up being paid.

“There’s an opportunity for potential renegotiation — so that you get the deal done, but potentially at a lower price,” Afsharipour said. 

David King, a management professor at Florida State University, said Musk may want to renegotiate the deal due to the drop in Twitter’s stock price. He pointed out that the luxury goods conglomerate LVMH was able to renegotiate the price of its deal with the jeweler Tiffany back in 2020.

LVMH wanted to back out of its planned takeover of Tiffany because of the threat of U.S. tariffs on French goods and Tiffany’s declining performance. Tiffany, in response, sued LVMH. The two did not have a reverse breakup fee baked into their contract but ultimately agreed to a deal, with LVMH paying $15.8 billion for Tiffany instead of the original $16.2 billion. 

There’s another price that comes with walking away from a planned merger or acquisition. Experts say that the way Musk has handled his negotiations with Twitter may hurt his professional reputation and make other companies reluctant to work with him. 

“If he walks away from this deal and pays that termination fee, you could have an argument to say that it’s going to be harder for him to strike future deals,” Afsharipour said.

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