Evan Tindell thinks Elon Musk will close the $TWTR acquisition (podcast #109)

Evan Tindell, CIO of Bireme Capital, discusses the circus that is the Elon Musk and Twitter merger agreement and explains why he thinks Delaware law and precedent suggest Elon would lose in court and be forced to close the merger on terms. You can find my piece on the circus that is the Twitter acquisition and why I agree Elon is likely to close here.

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Note this podcast was taped the afternoon of May 23 (just in case anything crazy happens after that).

Transcript begins below

Andrew Walker: All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like the podcast, it'd mean a lot to me if you could rate, subscribe, review it on wherever you're listening, watching, whatever. But with me today, I'm happy to have Evan Tyndall back on the podcast for the second time. Evan, how's it going?

Evan Tyndall: I'm doing well. Yeah, what's the record for most number of times, someone's been on the podcast?

Andrew: Oh, Jeremy Raper, has it locked up at, I think he's at 6. But if you want it, you're a sharp guy. If you want to try and catch up to Jeremy Rafer, I'm willing, if you are.

Evan: That seems like a lot of work. That's a long road to get there. But I'll do my best.

Andrew: And Jeremy's a prideful guy, man. If he knows people are coming for him. He's probably going to try now up his appearances. We'll just keep one-upping each other. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone. Nothing on this podcast is investing advice. We're going to talk about a really interesting, really hairy situation today, but everybody should have just remember, I'm not a lawyer. I know Evans is a former professional poker player, but I'm guessing, he's not a lawyer either?

Evan: Not a lawyer.

Andrew: We're probably going to be talking about a little bit of law terms. So just remember, 2 non-lawyers, so many law terms, not investing advice. Please do your own work. Second a pitch for you my guest, people can go listen to the first podcast for the full pitch, but you're a super sharp guy. You've got an eye for looking at these situations with skewed upside downside and swinging, and I think that's what we've got here. So all of that out the way I'm going to turn it over to you. To start[?] you're going to talk about is Twitter. I'm sure everyone's heard of it knows what's going on, but I'll turn it over to you. What's going on with Twitter, and give us a full situation overview.

Evan: Well, yeah, just for some background, Twitter's a social media company. It was founded... Yeah, I think everyone knows the story here, and just as a funny as far as the disclaimer, someone noted that the last idea I pitched on here is down 40% which was Tencent music. Someone lobbed that in on Twitter. Someone dropped that bomb right after your tweets.

Andrew: Down forty is the new up twenty in these markets.

Evan: So buyer beware, but yeah, I mean Twitter is an interesting situation because I think a lot of people are confused including apparently the market about what's going on. I mean you have Elon, obviously, Elon Musk, in case people don't know who Elon is, offered to, not just offered but has a signed agreement to buy the company for $54 and of course, the 20 cents on the end. And he's been making a bunch of rumblings about trying to basically back out of the deal. And now the stocks trading for, what is it this morning, 37 something? And so I think it's pretty large, I mean in the merger arb world's a 40% returns of the deal price is obviously gigantic. And usually, it implies that there's some, I mean, I don't know what your experience in this is, but it implies like there's some obvious regulatory or anti-trust issue, or there is some credible reason for the buyer to back out. Although as we'll talk about that's almost never the case.

Andrew: Great example would be right now. Activision Blizzard has a contract with Microsoft to sell themselves for, I think it's $95 per share. No one doubts if regulatory clearance comes in everything, Microsoft, they can take the interest on the cash in their piggy bank and pay for Activision bill. It's a huge deal. But nobody doubts their ability to close if they can close, nobody doubts that they want to close, but that's trading at about 77, so a huge spread. Because people are looking at them saying, the regulatory environment is not great for big Tech buying something else. So, people price it at 77 because they say, hey, basically a coin flip, if this goes through. If upside's 95, downside's to 60 and we can debate downside. But their pricing at a coin flip. With Twitter, $37, the deal price is 54-20. So it's an even bigger upside and that's because people are doubting. Hey, can and will this deal close?

Evan: Right. And the reason that he's given to the extent that you would even really call it a reason is because of what he's claiming are material misrepresentations in Twitter's financial statements. And the specific thing that he's claiming is that the percentage of bots and that they claim in their financial statements as less than 5% of daily monetizable, that's the right word?

Andrew: mDAU, monetizable daily active users.

Evan: Monetizable daily active users is less than 5%. And Elon thinks it's some much higher number. And I mean, there's a number of ways we could attack how we want to talk about this. I mean, the first thing is that he barely pays lip service to the actual definition of what they're talking about. Twitter, because what matters to Twitter is the percentage of their users that they can actually serve with ads, right? Which is why it's monetizable daily active users. It's not like if there's some spambot that's just accessing the ability to post via an API. And they're not like refreshing their feed and like looking at it like a physical person would. They're not getting served ads and advertisers presumably aren't being charged for any ads. So, they're not monetizable, therefore, they don't go into the daily active users' counts, and therefore the ways that Elon has proposed like he... I'm not sure if he even thinks this is a serious thing. There's no way that he can, but he proposed counting the first hundred followers like, "Oh, hey, everyone, count your first hundred followers. And if more than 5% looks like bots, then I guess you're just making up these nonsense ways to count it." I don't know.

Andrew: I'm with you. It was absolutely crazy. Because again, Elon is a master, kind of salesman, attention grabber, and everything. And so when he says, "Go look at your followers and tell me if more than 5% are bots and you'll see." It sounds great, but Twitter has been very clear. They're not saying that 5% of the users, the actual handle on Twitter are bots. What they're saying is, when we give you a monthly monetizable daily active user account, that number about 5% of them are bots. Because they know that if they've got 500 kajillion people on the platform they probably know that 4.9 kajillion of them are bots and they don't include any of them. So, Elon's doing this really great slide of hand with a lot of the things that he's saying, where he's saying, "Oh, count your bots."

That's not what Twitter was claiming, but we can talk more about the bots on a second. I just want to pause here. So, I think we've laid out the situation. So there's got a contract 54-20 the stocks at 37 if it goes through, you and I are very happy because full disclosure we both own shares if it doesn't go through, you and I are both very sad. But let me pause here and ask the first question I do every time. This is a 45 billion dollar merger. I think it might be the most-watched merger and company of all time, right? 45 billion dollar merger front page of CNN has Elon Musk news every day all best. Every merger arbitrage in the world at least knows about this story. So, when I talk about something with this many eyeballs on it, the markets clearly pricing it in some low odds that they're still going through. Where are you and I diverging from the market? What are we seeing that the markets missing that results in a not a guarantee [inaudible] obviously results in a risk-adjusted alpha opportunity for us?

Evan: Yeah, I think there's a number of way, another reason why people might be getting this wrong. I mean, obviously one thing, I don't know, I'd be interested to hear how you feel about this. One thing with any really large merger maybe Activision could be an example of this as well. Just like the physical, just the amount of dollars that you need to arbitrage, a deal of this size, 40-50 billion, 75-80 billion is just a lot larger than some smaller deal. So, I think to the extent, there is a something to be arbitrage, just because has potential to get a little bit bigger, just because of the absolute dollar value and no merger or fund is going to have more than 5 or 10% in something like this.

Andrew: Look, say there's 200 billion in merger of capital in the entire world. I'm just pulling that number out of nowhere. But say, there's 200 billion and as you said, the risk limit is 5%. So, all that 200 billion, the largest position you give is 5%, that means there's a 10 billion risk cap on there. This is a $44 billion merger. So even if every merger are decided we're gonna have a 5% position in it. That's $10 billion. Would that be enough to close the spread on a $44 billion merger? I don't know, but it definitely could close it on a $2 billion merger. I don't know if you could close it on a $44 billion merger, so I don't know if that's true or not. But it kind of feels true to me. Especially, for people who don't follow merger arbitrage. Anytime there's an announced deal that's merger arbitrage and spades[?] are really wide right now because arson featherheads beat in, they're panicking. And I wouldn't be surprised if that plays into it here as well.

Evan: I think another thing is, probably, the fact that because markets are down there's just other opportunities--

Andrew: Exactly, yep.

Evan: Either people are worried about, what the price might be. The price might be like, worse than you expect if the deal breaks because it's hard to know how much things will go down. I mean, I think the other thing that's potentially at work here is it's such an idiosyncratic situation. I guess it's not the first time that a buyer has tried to claim some type of material adverse event and got out of the deal. So, from that standpoint, there is a little bit of a playbook. But if the first time you had the combination of the single largest equity check written by a single person, right? I mean, 20 billion [crosstalk].

Andrew: I think that's right. Yep.

Evan: The combination of Tesla shares being down 30%. I mean, they're still way above what they would need to make him not have the cash available combined with Elon's influence in the tech world and corporate America. You have like the activists involved in, whether it's Silver Lake or Elliott, and sort of their board members potentially being conflicted that we can talk about because people are rolling. So, there's just so many moving parts that I almost feel like it's... I think a lot of investors, maybe traditional investors more than merger are people. Merger are people are generally better, pretty good at putting percentages on things because you kind of have to be. But I know for like the average person that's like, well, there's two outcomes here, either he somehow gets out of it, or not. And so, I can't really tell the difference. It's sort of like, it seems it's an opaque situation and so, I'm just going to split the difference and it's worth halfway in between. That seems like that's what people are doing.

Andrew: I am kind of with you. So Elon's trying to get out of this. And I know that something's good when my mom calls me and asks me for questions and I gave her a 15-minute long rant over the weekend about what, why, I don't think Elon came out of it. The headline number right? Everybody before Elon put or right when Elon put out that tweet that said the deal is on hold which we can talk about how you can't put a $44 billion merger on hold, it's either on or off, there's merger contract. But he put that out and the first wave of response you would hear is, people, control laughing, termination fee in the merger contract and they would say, "Oh, well, Elon can walk for $1 billion," and I still hear people say, "Oh well if Elon really wants to walk, he can just write a $1 billion check," and yeah, that sucks. Like, I personally cannot write a $1 billion check. I don't know about you. My podcaster money isn't exactly spurting 1 billion, but lots of people say, Elon can just walk for a $1 billion check and I think both you and I think slash maybe know that is wrong. But I want to ask you, Elon's trying to walk. Why can't he just walk, write a 1 billion dollar check, and getaway?

Evan: Yeah, and I saw this from some smart people as well. Like, Hindenburg Research put out a short report on Twitter at when it was trading at 50 bucks. And that actually seems like a pretty smart thing to have done in hindsight just because of how flaky Elon is. But I also saw, Matt Levine talk about how it will be, it could be difficult to take Elon to court because no one wants to take Elon to court etcetera. But as far as the contract, people should know that there's, what the Twitter board negotiated and this is so somewhat standard in these contracts. Because they negotiated a termination fee in certain situations such as, if they don't get regulatory approval, right? Which seems likely that they'll get regulatory approval. But in the events that he tries to just completely get out of the deal, they have something that's called specific performance. And it's actually designed to not be a termination fee.

It's completely separate from the termination fee. And it's the part of the contract that allows the judge to say, "No, you actually have to specifically perform on what the contract says, which is you have to buy the company." And of course there is clauses to that. For example, everything that Twitter said, everything that they represented in the various documents has to be not false in a material way. But it doesn't actually have to be all true. It doesn't actually have to be all true. They can have made some mistakes in their financial statements, as long as it's not false in a material way. Which is very important obviously.

Andrew: And I know we're going to come back to this, but this is basically saying, look, if Twitter said, "Hey Elon at March 31st, we had $500 million and 70¢ in our bank account," and Elon finds out it was $500 million and 65¢ or something, right? He can't cancel whole transaction over a nickel. But let's go back to the specific performance. So, this is designed for exactly what Elon's trying to do. I mean, he's claiming he's trying to get out because of the bot issues, but I think everyone knows the bot issues are an excuse. He has buyer's remorse, he overpaid for Twitter, tech stocks are down 20 or 30% since he signed the deal, Tesla's down 23% and he's looking and saying, "Hey, Twitter's stock price would probably be 20 if it was a standalone company right now. I'm paying 54. Frick. This sucks."

So, he's looking for an excuse and this is what specific performance is designed to do, right? It says, "Hey, you've got buyer's remorse." That's not the reason. Delaware is a—they have based their whole State's business on, we enforce contracts, right? Contracts and law is synced[?] here. And Twitter consumed for specific performance. Will they win? That's for the courts to decide and we'd see. But it seems a pretty clear-cut case of, if you've got buyers' remorse, it goes to specific performance. You can't just take the break fee. Now, Elon could offer and Twitter could accept, but they consume for specific performance if they want.

Evan: Yeah, and people should know that there's a long history of the courts in Delaware enforcing specific performance. Just 3 examples that I was able to pull when I was looking at this was just recent ones from the past couple years. So, in 2020, KKR tried to back out of buying a company called DecoPac which I guess was a cake company, and they signed the agreement March 3, 2020, I think. And then literally, obviously two weeks later, no one was having birthday parties, and this custom cake company have seen their business down like 40%. And so [crosstalk].

Andrew: I'm surprised it wasn't down 99%, to be honest with you. But, yeah.

Evan: It's interesting because they, and if you'll go back to the filings. The company was trying to tell KKR, "Listen, the grocery business is booming. This is going to come back, blah, blah, blah." But KKR still tried to pull out of the deal. And so, they pulled out, they notified them that they were terminating the contract in April. And it went to trial, and the judge decided in roughly a year later in April or May I think of 2021, might have been February or January of 2021 that they had no good reason to back out of the deal and that they needed to perform on the contract. And then KKR closed the deal, like two days later or something. And this is a situation where there's two other interesting things. So, first of all, as far as a material adverse event which is the language that these contracts use. A cake company's business declining by 40% during COVID was not considered a material event so that's notable. Just as far as, so people understand the scale of what would have to happen to a particular company for to be a material event.

Andrew: Can I jump in here for one second? So, I do think Elon and I did a post on Twitter I'll link it in the share notes are room[?] to do, but he did an interview at an all-in podcast and you could hear him use the term, material, 4 or 5 times and that was not an accident, right? Because it's referred to as an MAE and in merger arbitrage material adverse effect, as Evan said, it's when you sign a contract and the business that you're buying gets so destroyed in between you signing and you closing that you can go to a judge and say, "Hey, this is a different business than what we signed for. We can't buy this." And COVID was not an example of material adverse effect, right? And before COVID, people didn't build in.

There's material adverse exclusion. So, now people have a pandemic exclusion. If there's a pandemic that destroys your business, not a material adverse effect. A lot of people look at the bot issue and say, "Oh, this is a material adverse effect." And it actually is not, right? Because material adverse effect refers to something that happens after the contract. What Elon's claiming is a breach of reps and warranty. Where he's saying, "Twitter said it was less than 5% And I think it's 20-25%." So it wouldn't be a material adverse effect on its own. Anyway, I just wanted to clarify that because I do see a lot of confusion around that.

Evan: Yeah, and so, a lot of the cases, where buyers get buyer's remorse and try to back out like this KKR case. A lot of times they make a number of claims and sometimes the reps and warranties issue is one of many.

Andrew: Yep.

Evan: And there's a very interesting case, another case, where Boston Scientific was forced to close on the purchase of a company that someone at the company was committing fraud and so they had lied on some FTA submissions? And what Boston Scientific tried to argue was that the appropriate test was whether a falsehood on the financial statements would have been material to the buyer, i.e., them. And what they said was that the appropriate test was actually something very different and they got this from the case called Akorn, which you probably are aware of.

Andrew: Oh, I'm aware of Akorn.

Evan: Yeah, you're aware of Akorn. So, Akorn was like the one case, I think in the history of Delaware where they actually concluded that there was a material adverse effect.

Andrew: Yes.

Evan: But the test from that case was the event has to create a durationally significant loss of earnings power. That was the test. And so, I think in this case, even if the bots' number was off, the idea that it would change the expected earnings power of the company in a durationally significant way just seems to me extremely far-fetched and basically impossible.

Andrew: And for those who don't, actually, I'll talk about Akorn once again, but the Boston Scientific case that you mentioned. Do you know who they were suing? Do you remember the case? So, people, including me, can go look at the case up a little further?

Evan: At Boston Scientific and it was at Channel Medsystems.

Andrew: Okay, and just so people, the Akorn case, they had a buyer, I believe it was Fresenius. Grade A buyer and after the deal got signed, someone leaked to for Fresenius and they investigated. And it was Akorn would make drops that go in your eyes, right? So, you needed a complete clean room, because if you put something in your eyes, it better be pretty darn clean and pretty darn pure. And there were literally roaches running around in the cleanroom, right? It's bad enough there's roaches running around in the kitchen where your food is made, but there were roaches running around in the cleanroom, they were lying to the FDA. And I know many people including myself, who, this went to trial and Akorn said, "We're suing you for specific performance." And Fresenius said, "Clearly, there's been a material adverse effect." And I know people including me, who looked at this and we were like, I don't know, there's never been a material adverse effect ruling in Delaware.

I think Akorn might win this, and Akorn lost that. And basically immediately filed for bankruptcy after that. But that's literally how, it can't be, "Hey, we're in a recession. Your earnings are going to be down 5%." I believe what the judge ruled and Akorn was, you need to have something that's going to vaporize like 50% of your earnings forever in order to be a material adverse effect. So, I know you said there were three specific performance cases, that you looked at, you thought were interesting. You mentioned, the one with the KKR. You mentioned Boston Scientific too, what was the third one?

Evan: The third one was Hill-Rom versus Bardy Diagnostics. And in this one, there was a big change basically, it's another buyer's remorse case if you look at what the judge says. And it was a case of Medicare rates changing significantly. And they were still not allowed to back out of the deal. And the timeline, one thing I wanted to do because if people were asking on Twitter about the timelines. And that case was decided in July 2021, and they first signed the deal in January of 2021. I think it depends on whether the court grants, fast-track status.

Andrew: They're normally going to grant. I think it's technically an expedited hearing or something. They're normally going to grant it because the business is in a lot of flux and judges don't like businesses. They realize for all parties involved if you go through a normal trial that takes like two to three years, they realized that that's really awful for all parties involved. For Elon, he would have 44 billion overhangs, for Twitter, they don't know if they can fire people. So, judges realized we need to get these things on quickly if there's a material adverse effect. I want to go back to what you said, buyer's remorse, right? I think we've seen several cases of buyer's remorse, you've listed a few. But what I thought was really interesting when it kind of rhymes with what's happening here. Was Louis Vuitton, Tiffany. And I'll let you tell it you want, I can tell it. But do you read any parallels into the Louis Vuitton-Tiffany story to gun Twitter Elon?

Evan: Yeah. I mean, it's sort of similar seems to the KKR case. Well KKR and LVMH, Tiffany are probably the most similar but both of them kind of rhyme with the Twitter case where, you had a business that when you buy it, right after you buy it, something happens and the markets are down, businesses down. I mean, in Twitter's case it's not clear that the business is down. But at least the markets are down 20-25%. And so, then and the buyer just tries to use essentially, the threat of pulling out of the deal and of course the thing that underlies that threat is the fact that you're trading price of your, they know that the board is looking at markets and saying, " Well, hey, if we do lose this somehow, our stock is going to fall so much because the markets are down." For example, with LVMH and Tiffany obviously in March-April 2020 stocks had fallen a ton. I forget actually, what the time is, I think by the end of the summer, though, they came to an agreement though. So I forget exactly what the timing on that was.

Andrew: Just for listeners because I'm going to send this to my mom. And I'm sure she wasn't falling LVMH Tiffany at the time. Just for listeners who weren't familiar Louis Vuitton, one of the world's largest luxury goods company announced a deal to buy Tiffany's. COVID hit and Louis Vuitton, they are run by a very smart, one of the richest people in the world, and they said, "Hey guess what? We probably be able to buy Tiffany's for less today than we did a couple of months ago because of the COVID." And they tried to throw all sorts of excuses to pull out of the deal. But the bottom line was, they had buyer's remorse, they knew they were overpaying. They tried to pull out. Tiffany sued them for specific performance for breaking the deal.

And eventually, it was really weird Louis Vuitton actually went to a French minister of some form and had them write a letter to Tiffany's that said, "Hey, Louis Vuitton can't close this deal." Even though the French regulatory body had like zero jurisdiction over the deal. It was very strange, but they were pulling all the strings. And eventually, they settled. And Louis Vuitton got a token haircut. The stock price went from, they were going to buy Tiffany's for 135 they cut it down to 130-150, if I remember correctly. So, that's still tens and hundreds of millions of dollars that they save, but it was a very small cut in the grand scheme of things.

Evan: How large, where did Tiffany trade in the meantime?

Andrew: It's tough to remember because this was a height of COVID. So there were margin calls going on and everything. But if I remember correctly, I don't think the stock ever went materially below like 100 or 105. So traded to 30% spread. And I think people for a long time, I read a lot into the Louis Vuitton-Tiffany thing and we can also talk Alere-Abbott which is the one that I like. But I think there's a long history of if you have buyer's remorse the court is going to force you to close. I do think even at the height of COVID with Louis Vuitton, people did look at Louis Vuitton as a rational animal. And said, "Hey, if the judge orders them to close, he will close. If Tiffany's offers them a big enough discount, he looks at long-term, he will."

Whereas the one difference I see with Elon-Twitter-Tesla is, I don't know if people look at Elon as a rational animal. They think he's just like such a wild card. He told the SEC, he said, "SEC, three-letter word, middle word Elon's. I'm going to give you a hint, the first S was, suck and you can figure out what the C was." People just look at him, if he goes to court he might just say, "Screw the whole thing." Or maybe he files for personal bankrup-, people don't know what Elon's going to do. And I think that's getting baked in here.

Evan: Yeah, and I think that's interesting to bring up because I have a kind of a theory around this. So, I mean, a lot of the ways that Elon has kind of messed around and kind of skirted rules throughout his career. The rules are a little bit fuzzy as far as what types of things you can tweet out. Disclosure rules and I mean, obviously, he broke some rules as far as when he filed some forms and whatnot with the Twitter situation. But I think what was the word you used to describe him? Chaotic or you know.

Andrew: He's not a rasher actor. He's chaotic. He's a Salesman.

Evan: I think he's a non-rational. So I think the Delaware courts are where non-rational like chaotic actors, go to die. I remember, so we were involved in the Dell appraisal case at my old firm. And this was in front of Judge Laster.

Andrew: I know the case. I know the judge. I know, yeah.

Evan: And so I will always, I will never forget. There was a guy who was a, he was one of the top people at either Bain or BCG. I forget which one. And he was testifying, he was being questioned and on cross-examination, he wouldn't directly answer the question. And the dressing down that he got from Judge Laster was, everyone in the courtroom was, oh my! We were all, and the guy's face turned red. I thought he might cry actually. And I just remember thinking, this judge does not give a crap about who you are, how rich you are, or whatever. If you go in there and you try to bullshit him, you're going to get your ass. It's not going to go well for you.

Andrew: Look, I'm with you. I agree. Like Elon's gotten out of a lot of stuff. I thought you Elon should've lost the SEC case. I thought there were a couple cases he lost. But the facts and law are going to be pretty clear. And maybe, Elon can prove that Twitter was just flat-out lying about MDA use and all this. And he should get out of the contract. But I feel pretty good if the facts and law are and your side and there's no smoking gun here something. Courts are aware If you're a liar if you're a huckster, it's where you get stopped, right? You can look at in the current environment. You see a lot of people who lie all the time when they're on TV and stuff, but then they go to a court and their ask something and they're smart. They know, they say, "I don't recall. I don't remember." Because you lie, you perjure yourself in court, the consequences. That's the one place you can't really lie, and it will come back to bite you if you are proven wrong.

Evan: I think, Elon's smart enough, these arguments he's making. He's not even going to bother making them in court. It's not even going to get, he's not going to put in front of Travis Laster. The argument that him counting a hundred of his followers is the equivalent to some type of evidence about their financial statements.

Andrew: Let's go back to, so this goes back to the MDA you point. And I do want to go back because I might disagree with you. Because the one downside here I think, Twitter will win in court. But for Elon, what's the downside to go into court, right? You go to court and you don't perjure yourself, right? So you don't get yourself thrown in jail or anything, but you go to court and you just rant and rave and scream about how the MDA use and some material adverse effect, and you get laughed out of court, right? The judges, rules, and Twitter's favorite six months. The downside is, you have to close it 54-20. And you spent a couple of million on lawyers fees which doesn't matter to you. And maybe you boosted the value of Twitter because you're increasing Twitter engagement by this crazy court case you're doing, right? And the upside is the you get the Hail Mary and they let you break the deal or the Twitter board is so scared that your Hail Marys going to pay off. They come to you and say, "Hey, we'll take 46, but it needs to be buttoned up all the money's in an escrow account. We signed this, you close the next day." It seems it's all upside for him. The longer he fights this, right?

Evan: Well, and I think that is a perfect description of why he will fight it. May very well fight it most of the way. I mean, I think what you describe is probably, why he has a huge incentive to fight it all the way up until the trial. Because I mean, how long is the trial going to take? I don't think the trial itself would take more than a week or something. A few days, even. I don't know?

Andrew: They'll be the lead-up and stuff. But, yeah, a week, two weeks.

Evan: As far as his time, it's not gonna take much. But I think he is perfectly incentivized to continue kind of messing around with his public statements. And kind of just trying to see that kind of throw spaghetti at the wall and see if the Twitter board just for some reason, caves despite the facts are on their side. I completely agree. I mean, we'll have to see whether he's actually willing to go to Delaware and sit there and act like an idiot and rant and rave as you said. Because at that point, I mean Twitter has like doing all the discovery likes it. I mean the other thing is the discovery might not be great for him. I mean, of course, it's all privileged except for stuff that's being used in the actual trial which means, they're going to have to do like keyword searches of all his text messages and his email and whatnot. And I mean some pretty damning stuff would probably come out as far as his actual state of mind with respect to this deal. I kind of think that the discovery would probably show that it was just like you said, it was just a very transparent case of buyer's remorse. And there's not really a real thing here. And at that point, does he really want that to all come out? I don't know.

Andrew: For anyone who's ever been Delaware, a lovely State, one of my best friends, he listens to the podcast so he'll probably hear this. You went to school at the University of Delaware, lovely state, but it is not fun going to Delaware and being in trial. I've done it a few times. I served on a creditor committee. You have to go to Delaware. You're in the courtroom for a long time. I'm sure Elon's got handlers who can recess[?] that. But it is not a fun experience. I don't know anyone who would be, "Yeah, let's go do it." Let me ask a few questions that are just kind of lingering around. I'm gonna hop around. Look, I think one of the interesting things here is, Elon is claiming that, hey, Twitter's disclosures represented more than 5% of their monetizable daily active users or if 5% or less were the bots. I think it's way more, right? Elon's claiming that.

And there's two interesting angles that I'm just always back and forth on I want to get you to read on. Number one, obviously bots were a known problem. Twitter has been highlighting in their 10K case for years. Elon in the deal press release, Elon, says, "One of the reasons I'm buying Twitter is to fight back on the bot problem." Right? And now Elon would say, well, he even said it on Twitter, "I relied on Twitter's filings when I made this and now I think that the filings are misrepresented." Do you read anything into, hey, this was such a known problem. It's going to be difficult for Elon to back out on that. Or do you think? Hey, if Twitter misrepresented it, he will be able to get out on it?

Evan: I mean, I think that technically, my understanding of the law and the way these contracts are written and interpreted is that if there really was a misstatement in their financial statements, that would cause a material adverse effect. Then I think he could. I think he could probably still get out of the deal regardless of whether or not, someone could prove that he might have suspected that the, because it's one thing. I mean, it is one thing if let's say, it turns out that a100% of all, even the monetizable daily active users. A 100% of all the monetizable daily active users were bots. No one actually uses the platform and [crosstalk]

Andrew: It's just you and me DMing each other every now and then about interests [crosstalk].

Evan: Maybe Elon himself is a robot and therefore the business was inevitably going to unravel once advertisers figure this out. Which I mean, of course, isn't true because they can see when people come from Twitter. They can like, do ads that are only on Twitter. And could see how that impacts, polling data and purchases. And companies understand. Digital companies more than other ones are good at helping advertisers understand their ads are having an impact. So I don't think It's really credible. But in that in that situation, I don't think it would save Twitter to say, "Well, he knew that there were some bots."

Andrew: Let me go to a different one. I think that answers this but let me ask another. Elon, he was so eager to buy Twitter that he waived due diligence. Right? And I was of the opinion, hey, I think it's going to lead to a really negative paper trail for him that he waived due diligence. But I've had lawyers say, hey, you can't read anything to waiving due diligence because he can say, he relied on Twitter's statements. And if they were materially false, as you said, he can get out. But I don't know, because my two things would be, Twitter makes very clear in their financial statements that are NDA. Your bot number is an estimate. And if Elon, knew about bots, if Elon was really concerned about the bots he could have gone and looked at how they calculate them. The algorithm, they could've shown him.

The assumptions he could have tweet[?] them. That would be number one. And then number two, Elon says, "Hey, this is a material adverse thing because advertisers are going to be bamboozled by it." And as you said, advertisers know that bots are a thing, and the advertisers figure out a way to judge their ROI. And in due diligence, I was at private equity before I was a consulting before. One of the first things you do in due diligence is, you would call up a major Twitter Advertiser and say, "Hey, talk to me about why you choose to buy a Twitter. How do you adjust for a bots? How do you just for gained and stuff?" And he had the opportunity to do all this due diligence and he waved it. I don't know. I just think, even if that's not a smoking gun. I do think a judge is going to look really negatively on that. What do you think?

Evan: Yeah, I agree. I think they can't technically say, well just because you didn't do due diligence means that anything we said in the financial statements [crosstalk]

Andrew: Anything goes.

Evan: Because he can actually say, he can say, "Well, the whole reason why I was able to waive due diligence to get this deal done so quickly is because I thought that your financial statements were accurate." So he can kind of use that defense. But I do think that it will help a judge see through the very thin veneer of the buyer's remorse situation. It just makes it all the more clear because while it's not technically illegal out, if Twitter was, it completely on purposefully lying about the number of bots that are in the monetizable users. I think, what it does is it shows that this is not really something that Elon thought was a make-or-break thing for the deal. It just creates a very transparent situation where he's just obviously lying.

Because like you said, regardless of whether... because it's entirely possible that the bots thing is a major problem. Twitter was accurate in how they described their estimate and that must could've learned something important that maybe would have made him not want to buy it. Given the bot issue if he did due diligence. And so the judge is going to say in that scenario it would have been if bots were so important, it would have been really important for you to do due diligence. Because you can't really rely on just backing out the next day over supposed lies in the financial statements. So I think what it does is it exposes the transparency. It exposes just the baldness of the lie. And so I think that will be very tough for him to overcome

Andrew: Due diligence. I agree with you. Right? They're going to be able to go in and get all of Elon's thing. And if there is one email after the deal was signed that's like, shit tech stocks are down a ton since I signed this. My financing is going to be more difficult. I'm I kind of wish I hadn't signed this. That is going to be such a smoking gun. Now there is the counter to due diligence. Right? If they get to due diligence, sorry, discovery. I'm saying DD because I'm so... Discovery if they get to do discovery on Elon, Elon gets to do discovery on Twitter. And I do know some people who are thinking, hey again, if this is a free roll[?] for Elon. For a couple million dollars, maybe he can break the seal that he majorly overpaid on. Do you worry at all about diligence where he goes in and he finds one smoking gun from a mid-level employee that says, "Bots are way worse than we expected or something?"

Evan: I don't know, man. I mean, it would have to be, you'd have to argue that even if they knew there was more bots he would still have to prove that it would cause a material adverse effect on the overall company. And I just don't see how. Because, as you said, everyone already knows there's bots and whether it's 5%, 10%, 20% it's very difficult to prove that that's going to cause a material adverse effect. The bars is so high. It's literally only been jumped by one company that immediately went bankrupt afterwards. Right? Twitter is not going bankrupt. I can guarantee you that advertisers are not like, "Oh man, there's bots? Elon said there's bots. Let's pull all our ads." That's just not what's happening.

Andrew: It's one of the things that again I hate to keep referring to the all-in podcast. But this is the podcast he did a week or two ago where he went on and every host is like, "Oh, yeah, Twitter's so bad with the bot problem." It's like you're talking to the man who's supposed to be the best business mind of our generation. He just signed a $45 billion deal. We've known about Twitter bots for ages. And two weeks later all of a sudden he discovers that bots, might be a problem and everybody's applauding him for pointing out this thing. Like what are you talking about? It just boggled my mind.

Evan: Yeah, I mean, it's so transparent what he did because obviously, I mean also what changed? What changed in any of the bot information between when he's in the last month? He only signed the deal in April. I mean, nothing changed in the last month with respect to bots. The other thing about the all-in podcast is they, I listening to them because they are smart and they're kind of like tuned into the VC world. But I often think they're a little bit. They're just giving you the zeitgeist of, for example when Netflix is down 30%, they're all saying like, "Oh, I never use Netflix blah, blah, blah." They're like, "Oh, I'm HBO all the way." They're just piling onto whatever the popular thing is and Elon's a popular guy so they are all team Elon it seems.

Andrew: Yeah, look, nothing to disagree with. It just like it really got my hair up that they were so egging him on. When it was this was a disaster of a deal from the start and you're egging them on for this. And then one of them, the host who's really egging him on was trying to raise an SPB that he would make tens of millions of dollars off of. It tries to reason... And SPV to support Elon taking Twitter public while at the same time, encouraging these bots are disasters. Wow, that's really, I don't know the term, but it's not good. It's not great, Bob.

Evan: It's a very strange. Unless you think about the fact that everyone that is on Elon's side of the deal. They actually would love to somehow get a lower price, right? So actually maybe that's no worse than just talking your book. Right? Because if the bots are an issue and it causes Twitter's board to cave for absolutely no reason, they just blink and they say fine, screw it you can buy it for 46 or something. That would actually help his SPV. So maybe he's just looking out for [crosstalk].

Andrew: It's not a great look where you're out trying to raise money from smaller investors in a vehicle that's laden with fees at 54-20 while you're doing that or two days after you've sent that email out trying to do that. You're bashing the Twitter deal that's overpriced because of these bot issue. It just wasn't a great look for me. Let me ask again, I could go everywhere this thing, but let's drill it in the financing here, right? Because what if the risk to Twitter and I, my head goes crazy every time I try to figure this one out. When the deal was signed, the biggest risk the deal aside from, I'm being mercurial, was financing. And this has committed financing but a big piece of the financing was a margin loan on Elon's Tesla stock.

At the time the deal was signed, If I remember correctly if Tesla's stock went below 600, I think where the margin call would hit. And a margin call is not, hey, the financing has gone. The margin call is Elon, you have to put up more margin or try to find a replacement financing. But it would have let him get out of the deal if he got margin called and he couldn't replace the financing, right? But since then, he's raised a lot of equity from co-investors, from selling Tesla stock, from all this sort of stuff. And because of that, the margin mall level has gone down. However, I don't know where exactly the margin call level is currently. So I want to ask you a couple of questions here and I realize I'm throwing a lot at you. What do you think about the financing risk here? Do you know where the margin call level is, at this point?

Evan: I don't know. I don't know exactly what the level is right now if you kind of back out there. Because it was 7 billion in external either current minority investors that are rolling their stake or external capital, right? And he's already sold 8 or 9 billion of Tesla stock.

Andrew: I think that's right, yeah.

Evan: I forgot what the actual number was. And at the end of the day, he has to come up with a $21 or $22 billion equity check, and then he has to put 12 or 13 billion of margin loan essentially. But he has two things. Obviously, he has over $150 billion worth of Tesla stock even at current prices. Some of that's already encumbered by margin loans but he also has his 40% or whatever of SpaceX that he owns. So one thing that's interesting is he can't just, if there is a margin call, he can't just back out and say, oh it's no longer like you said, it's no longer, he has to use reasonable commercial efforts to seek financing. And actually, that was an interesting part of the KKR decode pack decision.

Their financing actually, they claimed it wasn't available. And what happened was, it wasn't basically after COVID hit, KKR went back to the lenders and said, "Hey, listen, we need all these concessions in terms of leverage multiples because the company's profitability has fallen. We need all these concessions, blah, blah, blah." And the lenders said, "No." And they claimed that that made the financing not available and that allowed them to walk, but the judge said, "No, actually because the banks were still willing to lend on the original terms. You essentially sabotage the financing."

Andrew: Hey, you said you sabotage the financing. That brings me to another interesting but I do wonder. So, I think the Tesla kind of margin call level is around 3 to 350. It might be as high as 400, but I don't know for sure. But I do wonder, if Tesla, hey, the stock has to get cut in kind of half for this to come up. But if it happened and Elon went into judge, I can't raise this money. He has to use reasonable efforts. I wonder if Twitter could go back and be like, judge, "He can't raise this money because he's out here, in breach of contract." This is another question I was going to have.

Everything he does on Twitter right now is in breach of the merger contract that says, basically, he won't slander Twitter or the deal. In breach of contract, he was out there blowing up the deal telling lenders he didn't like this, all this sort of stuff. I wonder if Twitter could argue that and a judge would say, "Hey Elon, you actually do still have the assets right? You could sell SpaceX. You could sell all your Tesla stock. The reason you can't perform is because you blew up your own financing." I wonder if a judge would hold them to that and make him perform in that. I think it's low likelihood but I think it's a possibility.

Evan: Yeah, I mean that it does. He is obviously saying things that are negative about Twitter in general. Right? So I agree with you. I do think it's possible that a judge could look at his comments and say, you know you contribute it. And because like you said, it was in the contract that he's not supposed to disparage the company. For this exact reason, right? One of the reasons. So that the deal goes through, the banks don't get scared, the banks don't pull the financing, all other equity investors write their checks etcetera. So yeah, that does seem a possibility to me. Although I'm not an expert on the legal or the precedence there and whatnot.

Andrew: The co-investors in the deal, right? And there's a bunch of co-investors. One of the Saudi Arabian formal funds owns 4.9% of Twitter, and it's just going to roll their equity into the deal. I believe one of Brookfield's funds writing a $100 million check to go invest in here. How Elon's talking on Twitter at all, does that impact their obligation to fund, to co-invest, or anything?

Evan: I would love to know about the discussions between the co-investors and Elon. I mean, I actually wonder if part of what's going on here. I mean, who knows? But I wonder if part of what's going on here is the co-investors saying, "Listen, I know we're committed here. But please try to get us out of this. The stock would be 30, 40, 50% lower. We don't really want to do this. Please let us out of this gently." I don't think it would affect their contracts. I don't think he has filed those contracts as far as their commitments. But even if it did, he would still be on the hook because anything that he does personally, affect the availability of financing. I mean, he has to actually proactively try to keep the financing and if he doesn't, the judge will rule that he still has to pay. Still has to buy the company.

Andrew: One of my big worries and just making a complete shift. One of my big worries, which I have gotten much more comfortable on. But look, Twitter is a mess. This drama. This is a circus with Elon Musk. And one of my big worries was Elon is going to try to break and the Twitter board is going to look at that and say, "We've got a lot of work to do. Elon is a wild man. We can't rely on him." There'd be some back and forth, but eventually, they just say, let's just take the billion-dollar check from Elon and let's walk and lick our wounds, or maybe they could get up to $2 billion. But you know the difference between getting a $2 billion check and walking and the stock price would go down a lot. We can talk downside in a second versus specific performance is huge. So I was kind of concerned for a long time that the board just wasn't going to have, the cojones to go and sue Elon in court. I've gotten more comfortable on that, but I want to ask you, what's the risk that the board, the management team kind of just say, "Hey, but it's Elon's being Elon."

Evan: it's obvious than the biggest risk from the beginning is given the other fact patterns. And it's very strange because it's one of the only times where maybe you can think of another one, but I can't remember a situation where all the facts are on one side and the main thing you have to worry about is just people not giving a shit or people not doing their fiduciary duty. That is pretty rare in Corporate America that you have that as your main risk. Usually, it involves some very strong conflicts of interest. But in this case, obviously, that has been a worry and of course, there's a couple of them that are conflicted, right? I mean, you have Jack Dorsey, who is if you look at the merger, docks.

He was talking to Elon for a long time about taking it private. He's on team Elon all the way they're clearly, just boys. And he's been rumored to potentially be rolling, his, I don't think he was on the filing that Elon did, as far as, committed financing and people who are rolling their stake, but I think people have been talking about him. He has been in talks to roll his stake into the new entity and clearly, anyone that's rolling their stake into the new entity is conflicted. Because you actually want a lower price in that scenario because of your own, either they'll be less debt or you own a higher percentage of the enterprise, including, right? I think also the Egon Durban who the Silver Lake partner. Silver Lakes also rumored to be potentially involved in rolling their stake into the new entity. So he's also potentially conflicted. But everyone else is pretty independent, I think.

And I know people have heard rumors about how the board feels about Elon. If I am the board, I am furious. At how he is trying to rip up a contract in broad daylight through the most transparently, in the most like brazenly dishonest way. I would be absolutely furious. And I would be just salivating over the opportunity to take him to court honestly. So I don't know. Nothing that they've done so far has explicitly shown me that that's not how they feel. Because they haven't said much but there was a couple of articles, there was a couple internal emails and stuff saying that. Where they're telling their internal people that, there's no such thing as putting a deal on hold and whatnot.

Andrew: So, if I can disagree with you on, I think the board I've gotten much more comfortable, my post will be in the show notes. I've gotten much more comfortable. So on May 17th, they filed a press release that says, "Twitter files preliminary proxy for acquisition by Elon Musk" and in it, it said, "Twitter is committed to completing the transaction on the agreed price and terms as promptly as practical." Now, maybe you look at that and say oh that's boilerplate, but I have never seen a company include that line in a filing. I haven't seen a lot of press releases saying, we filed the prelim for a merger agreement. I've never seen a company include that line. And that plus there was a Bloomberg article that said the board was going around telling people we're going to close this on terms. We're willing to, I think they even said we're willing to go seek legal remedies if we're going. So I've got a lot more comfortable there. And then the second thing that I thought was interesting. I'll just rant for a second. This deal was agreed on April 25th, is the day they put the press release out saying, "Elon Musk agrees to acquire Twitter."

They filed the prelim proxy for this deal on May 17. April 25th to May 17th. That's what? Three weeks. $45 billion merger prelim proxy in three weeks. I can't think of, I've never seen anything that close. I mean, maybe somebody with better skills on the computer can find an example. I can't think of, that's like, a tender offer of fast for getting those docs filed. Normally it takes two-three months to get the prelim proxy out. They filed that so quickly. And if I was the board, my best strategy would be, to let Elon rant and rave, we're going to meet all of our requirements, we're going to file the proxy. We're going to get the shareholder vote approved. We're going to get all the regulatory stuff done. And then we're going to go to Elon and say, every condition has been met. We would like you to put $45 billion into your checking account. And Elon cannot, and we're going to sue or Elon can and we'll close. And based on what I'm seeing by that prelim timeline, Twitter just casually saying we're committed to doing everything on terms. It seems like that's the strategy, they're taking.

Evan: Yeah, and it is the best strategy because there's nothing that they can say is going to at least in public nothing that they can say is going to certainly convince any of the Elon fans. The only thing that matters is whether they get regulatory approval, whether they cross all their t's and dot all their I's, and yeah, I agree. I actually didn't think about that, the line because I saw that but I didn't actually think about how rare that was. Because of course, every company that's getting acquired for a large premium is trying to get the deal done. Right? But that just threw that in to make absolutely sure that everyone knew that they are doing their best to get the deal done. On the original terms.

Andrew: My partner were usually Chris. She likes to say... One time she was listening to Britney Spears and somebody asked her about if she was a virgin, she said, "How dare you ask that question." And if you were just listening, you wouldn't have taken anything from that. But if you have listened to her the past five years, everyone who, every time she'd been asked, she'd said, "Of course, I am." So it wasn't what she said. It was the change in what she said that you notice. And that's kind of how I view that proxy line. In a not too appropriate. Analog. Let's see. Last thing I want to ask, one of the crazy things you'll hear, I think, the Matt Levine had this is, what if Elon goes to court and he loses and a judge orders specific performance and Elon refuses to specifically perform. I think that's a crazy risk, but I'll flip it over to you.

Evan: Yeah, I mean, I think he goes to jail because you can look up, there are cases where the Court of Chancery has ordered people to jail for contempt of court for failing to follow a court order. I don't know. I don't think it's ever happened in the case of a company failing to specifically perform on a merger agreement because that's just completely nuts, why would you do that? But there and it was actually Gore versus Wu, and if you look on delawarelitigation.com, which I think is just the Court of Chancery the Delaware courts like website, or it might be a third party website. I'm not sure. It's back slash Wu order for prison. And I'm just imagining that being, Musk order for prison. I don't think he would ever let it get to that point. But I mean, at the end of the day, if you don't do what the court says, they're confined you some ridiculous amount but it have to be like a million dollars a day or something or $5 million a day. I don't know [inaudible].

Andrew: If you run the conspiracy theory down. I've known people who've been, well, Elon's in Texas. He's just going to go to the governor of Texas and be like don't extradite me to Delaware. This is political prosecution and we'll try to score political points. And you can keep running down that. But what I come to is look, Delaware knows if we let a billionaire get out of specific performance because of this. Again, the whole merger contract system is screwed. And guess what? There are a lot of counterparties to Elon that Delaware can start going after. Delaware can go to every bank and say, "Hey, all of you are headquartered in Delaware. You guys do a lot of business here. You guys want to keep doing business. We're putting a freeze on all of Elon musk's assets." They can just keep escalating. Yes, Elon's a wild man, but if a court orders a specific performance, I feel pretty good that we're gonna recover there. Maybe he ends up in jail. Maybe he doesn't. I think he's not going to because people are going to say, this is one thing you don't want to mess with. But they're going to find a way to get the assets.

Evan: Tesla's a Delaware company, right?

Andrew: I believe so. I would be pretty surprised if they weren't but Tesla's not a party to the contract.

Evan: As far as seizing his assets. Right? I mean, they can certainly put a freeze and not let him transfer any Tesla shares.

Andrew: Yeah, but that would probably be easier to just go to the banks that right? You just go to the banks and do it. But yeah, if he loses. They're going to recover unless he takes his Tesla shares, lights them on fire, and then flies off to Mars or something. Let's see. I've got a few floating notes around but anything else you wanted to say? Anything you think we missed here?

Evan: Sure. Yeah. I have one thing. Do you think it's probably too early for this, but what do you think about, what you think the likelihood is of someone like a Carl Icahn or a Dan Loeb or something like that? I think Ichan would be perfect, it would fits his kind of MO the best, but I'm curious what you think about that.

Andrew: So what's Evan's referring to is an activist most likely comes in buys up 5% of Twitter at today's 37 price and they say, this is an ironclad contract. I am going to force the board to enforce on this. We'll replace all the board before the contract even breaks. And our one goal is to go for Icahn to encourage on this contract. I wouldn't be crazy shocked. I agree with you. Carl Icahn fits. If you want to get really fun if you're Jeff Bezos, why not buy a 5% of Twitter and say, "Hey, I'm forcing Elon to specifically perform on that?" I think it's possible. Look, I think this is a really good risk-reward. It is completely idiosyncratic for the markets. This is, if you go back to the 80s and 90s, this is one of the things that activist funds were kind of form to take advantage of. You think of John Paulson, making his fortunes on CDS and non-correlated asymmetric trade. Yeah, there's a lot of people and a lot of these activists have legal backgrounds. I think there's a chance.

Evan: I think Ichan would fit particularly well because a lot of what he does, he tries to couch it in terms of sort of improving the functioning of Corporate America. And this fits that to a [inaudible] because this is really a question over whether contracts matter and weather boards are willing to pursue the fiduciary duty of minority shareholders, even at the expense of pissing off the world's richest person. And so I can't think of a better person for something like that than Uncle Carl.

Andrew: Yep, I guess last two things. I've just got to pull it around. We've been saying specific performance. I do think one downside I've heard from people is, while courts will rule for specific performance, courts really don't like to go to specific performance just because they're forcing people to close. I do think the courts are going to be nudging everyone. Mediate, mediate, settle, settle, settle so I would not be surprised if you see a slight price haircut here. But Louis Vuitton, Tiffany height of COVID. They cut from 135 to 130, 150. Alere-Abbott, which I mentioned in my note. That was a disaster. That business was falling off a cliff. There was some fraud, there was a DOJ subpoena for bribery, Foreign Corrupt Practices that one from 56 to 51. The precedent is, everyone goes into mediation. And the buyer realizes, "Oh, we have a really bad case if we can get a token haircut, that's probably the best we can do." I think that's probably the most likely in game. Again, Elon's a wild man. Maybe he just runs it up to the end.

Evan: But how can the board? I mean, I guess if you put it all in escrow or something, how can the board's read a new contract when he just, pooped on the last one?

Andrew: In order to get something you have to give something. And I think you say, let's choose 50 as a number. Elon, we will close at 50. That will save you $2-3 billion dollars, which is big in terms of the margin loan. It's big and turns everything. That is a mammoth one for you with how poor your court case is. But you need to put everything into escrow and the moment all the conditions close it's not even you transfer assets, the moments it's, we just release them from the escrow account. Right? We've got 20 billion in escrow. We've got a claim on all your margin loans, you agree to waive every single condition. I think that's what you have to do.

Evan: I like how you had to explain why 2-3 billion is a lot of money. The margin loan and you know that's important.

Andrew: Well, in a $44 billion deal $2-3 billion, it's material, but it's probably not the most material but to Elon who, he's getting a lot of debt that cuts a lot of equity check. It's a huge amount for him. So I do think that. The last thing I wanted to say, just when I was diligent seeing this morning for it, I discovered Hexion versus Huntsman. Are you aware of this?

Evan: No. What's that case?

Andrew: Listeners can Google this. This was a 2008 case. So it is very dated, but it was another case where buyer alleges material adverse effect. And there's a, I'm saying it because there's some really clear rulings on it. It says, Hey, material adverse effect, the buyer loss. It says, if you're the buyer, the burden of proof is on you to prove that material adverse effect. And then it goes to a lot of the other things that you talked about earlier. It has to be a long-term view of the material adverse effect. Missed forecast don't count it. Yeah, it's just a lot of things that back up everything you said. But if anyone wants to Google, Hexion versus Huntsman, I thought that was a very clear case. Now in that case, it is interesting, Huntsman won but I don't believe they got a specific performance. I believe they ended up settling for, this was hiding financial crisis, but they ended up settling for like a boatload of money. But it was not specific for in, so often diligence that a little more. But that's an interesting one.

Evan: Yeah, one thing that we've been a little bit worried about is that Twitter would try to negotiate for some giant settlement that would maybe seem like it was going to make them whole, but the amounts would have to be so large. I mean, you're talking about however many, what is there, 800 million shares outstanding or something times $30. I mean, it's gigantic.

Andrew: Ignoring, if they got like a 30 billion dollar settlement check or something, right? If Twitter breaks tomorrow and you can say they get the billion-dollar break fee. You can say they don't. But if Twitter just walks away for some reason, where are you running the downside to you for Twitter?

Evan: So, I think if you look at. So, one interesting thing is, we normally in a case like this, if the deal breaks it should have, if the person was paying a premium it should have a gigantic downside because you have to reverse all that premium. In this case, interestingly most of that premium has already fallen away. The stock's gone from 50 to 37, I think it was trading at 33-34 before a low 30s. However, the markets down since then, right? So I think if my numbers are like if you do purely based on the return of the market? It would be something in kind of the mid to high 20s? But if you then assume that there's negativity around the stock. And I don't know what your take is on their earnings report that came out. Maybe it goes to low 20s. I don't know. What do you think?

Andrew: I was using low 20s, but I had a couple of conversations with people last week. And one person was like they don't have a position, but they think they've got a great case and they were all sleek[?] if you read the proxy. Twitter's in the proxy, companies give earnings forecasts, right? Not forecast. But they say what their internal forecasts, sorry. And their 2023 and 2024 earnings forecast, I believe we're well ahead of where the street is. So, they were like, look maybe the downside isn't as big as people think. But then I had another person was like, Twitter told you eighteen months ago at their investor day, what their earnings and MDAAU targets were, and they're nowhere close to that. Who's going to believe in earnings target in the proxy. And by the way, Twitter is a disaster, and Elon Musk's proving this. So yeah, you could run your downside to 22-50 if you want, that would be kind of 9 or 10 times forward Ibadah[?] if you believe that. That's kind of where Facebook is. Do you really think Twitter is going to treat it Facebook multiples? I think the downside is way lower. And I hear both sides, I just kind of think, hey, I don't think this contract is breaking. I think we're getting a price cut or we're getting specific performance, to be honest with you. But yeah, I don't know, but it's a really interesting question. And obviously, it really affects it because the odds you're paying if the downside is 30 versus the downside is 20. You're a poker player. You don't need me to tell you it changes how much? How big of the [crosstalk].

Evan: I mean, yeah, I would argue to that guy, the Twitter is a, what did he say? Twitter's dumpster, fire, or something? Or Twitter's a mess. That's for a long time. That's kind of been opportunity at Twitter. Right? I loved when proving all the margin opportunity that exists.

Andrew: When Apple changed all the tracking data and everybody got really messed up because of all the tracking data changing. And all Facebook, Snapchat, all these guys that eventually really hurt them and Twitter could just keep coming out and be like, our operations are such a mess. We couldn't use any of the tracking data. It's all upside from here baby. I loved it. Last question, put you on the spot. Odds that the deal closed at 54-20, odds that the deal closes at a price cut. Nothing crazy, let's say, 10 to 15% max, which I think would be huge in the scheme of price cuts. But odds deal closed with the price cut and odds to deal just flat-out brakes.

Evan: I think it's something on the order of, I think there's a decent chance that the board will figure out a way to do some type of price cut just to have this be done. So I think it's maybe, but I mean this case is so strong. It's really hard to get into the mind of the board and because of all the positive things, they've said like you mentioned. I think it's maybe 60% 54-20 30% some type of haircut, which I hope would be tiny. And then10% case, 10% chance of something disastrous that somehow the deal breaks and he walks away with only a billion.

Andrew: I think just knowing how much certainty would close for the board. I think it's 40% close on terms. 55 plus to close with a small price cut. And then, I mean, look, one thing people have told me is you never put, less than 5% chance on something happening in the world because the world is full of right tails. But if you gave me truth serum and I looked at this contract. This is such a good contract. I don't think this breaks for any reason other than Tesla stocks at hundred and he goes to a judge and he gets a finance out and Twitter throws out the fifty-fifty shot of, "Hey, your finance out is off because you blew this deal up yourself." And a judge rejects that, right? That's how I see this deal-breaking to, be honest with you. And I think that's a very small chance. But that's how I see the deal-breaking. So that would be my odds. Don't hold me to it. I mean, I do certainly not size, I believe this is 99% to go through, but that's kind of how I see it.

Evan: Yeah, I think you're right. It might be because I agree. It would optically provide some certainty for the board. I think they would feel better, and just knowing this was behind them. Although I still can't wrap my mind around, the fact that they already have an ironclad. Things at separate. I mean, but you're right. If the money's in escrow maybe that makes them feel better.

Andrew: They've got an iron-clad thing, but it could get even more iron-clad. If they could get a contract at 53-20 that said Elon waves everything, right? He waves the bot problem. He puts it all in escrow so they could get more ironclad. But I'm with you. Last question and then I will actually let you go. A lot of interesting stuff in the market these days outside of Twitter. Anything interesting, that our listeners should be thinking about? I should be prepping the third podcast with you, anything catching your eye?

Evan: Yes, but I am still working on it so I can't tell you.

Andrew: I hear you. I put a blog post off the other day. I just think there's so much interesting going on. I haven't had full time to dive into JetBlue Spirit Frontier. I don't know if you're monitoring that. But I've never seen a board so entrenched. That situation is, Spirit is selling to Frontier and the merger price is $20 at the current price. And JetBlue's out here offering $30 per share and cold hard cash. And the Spirit board is, no, absolutely not. Regulatory risk. All this sort of stuff where their current deal has regulatory risks. JetBlue's offering it. Massive breakup fee. It's one of the craziest. And that's just one of the many, many crazy situations out there. Markets are scary, but I'm telling you event-driven is really interesting right now. That's not investing advice that's just saying, it's interesting out there right now.

Evan: And it definitely is. The only problem is that when the markets down this much, is that your current portfolio looks pretty interesting as well. So it's always hard to know where to spend.

Andrew: Twitter if it closes it 37-54, that's going to be the best thing in your portfolio. That's going to be great. But it is true. One thing I've heard from many people who are around in the global financial crisis which I was in college. So I can't even claim to have really been investing there, was there were a lot of spreads that were trading at 10% spreads and March 2020. Which looks great and they would close in two or three months, which sounds great and looks great. But the opportunity cost of buying those versus buying like some of these companies were priced for liquidation and stuff and would go up like 4X and a couple of months. The opportunity cost was pretty high and I would say, hey, that's markets could have kept going down. Markets didn't have to bounce this hard, right? I do hear you but when things start to get this rocky, the opportunity cost of every different asset class and security is the real hold back. I would say.

Evan: Yeah, definitely.

Andrew: Cool. Why Evan we've run really long, but that's because this was a lot of fun. It's a great situation. I really appreciate you coming on. I'm looking forward to you, trying to catch up to Jeremy Raper with podcast number 3 in the near future, but haven't seen a doubt. Thanks so much for coming on.

Evan: Thanks for having me.

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