What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing, perhaps the biggest technology story. So far this year is elon. Musk's proposed buyout of twitter. His main goal was to change the platform's content, moderation policies and increase free speech.

Musk submitted what he called his best and final offer of 54.20 per share, valuing the company at 44 billion dollars in late april, twitter's board of directors accepted the deal with a 200 billion dollar net worth musk is the richest man in the world and has more Than enough money to fund the acquisition also, he said that the acquisition had nothing to do with the economics. It was purely because he wants to reform their policies and promote free speech. The buyout came as a huge relief for many twitter shareholders who had previously been frustrated by the social media. Platform's inconsistent results in stagnant share price.

The acquisition price of 54 dollars and 20 cents represents a 40 premium over the trading price before musk got involved. It looked like a win-win situation. Twitter shareholders would make a quick buck while musk could add techno king of twitter to his long list of titles. In the weeks following the acceptance, twitter's share, price has fallen by 26, wiping out all the gains since musk got involved.

The share price of 38 dollars per share is a full 30 below the dollars and 20 cents that both parties agreed to. This is highly unusual. When a company accepts an all-cash buyout offer, the share price usually stays stable at a slight discount to the deal price until closing. So why is this not the case with twitter? A few weeks after making the offer musk put the twitter deal on hold pending an investigation into the number of fake accounts on the platform.

Fake and spam accounts have long been a problem for the platform with scammers, using bots to promote various crypto and other scams. Most social media platforms have similar problems, including youtube comments. Sections recently twitter said that estimated fake and spam accounts would be less than five percent of its monetizable daily active users in a recent interview must said that he estimates the actual number of bots to be at least 20 percent and maybe even as much as 90. Obviously, if the majority of users are fake, the company would be worth much less than the 44 billion dollars that he agreed to pay.

So what does this all mean? Musk said that the acquisition had nothing to do with economics is purely for the promotion of free speech. So why is he so concerned about the number of fake accounts? Twitter generates the substantial majority of its revenue from brand advertising. Brands pay twitter to show images and videos promoting their products. In most cases, the brand has no way of directly measuring the impact of their twitter ad campaigns.

There is no way to directly link sales with twitter ads, but there is clearly a benefit to the brand if millions of consumers learn about their product on twitter. Twitter currently says that they have 229 million monetizable daily active users. If it turns out that half of these users are fake, advertisers will be far less willing to pay for twitter ad campaigns. So clearly, the number of fake accounts on the platform will have a huge impact on the company's valuation in their most recent 10k filing twitter claims that fake accounts make up less than five percent of the monetizable daily active users.

Importantly, they caveat this by saying they applied significant judgment in their assumptions, so the actual number of fake accounts could be higher than their estimates. So far, they have refused to publicly disclose their method for calculating their five percent number. They say that this would require disclosing sensitive information which they cannot do for privacy or other reasons to come up with his own estimate. Musk conducted his own test.

He randomly sampled 100 followers of the at twitter official page and found a number of fake accounts far higher than 5. However, this is not a statistically rigorous test for a variety of reasons. Firstly, a bot account may follow many hundreds of accounts to make itself appear more legitimate. A real human may only follow a few dozen close friends, so even if only five percent of the accounts are fake, the number of fake followers may be greater.

Prague agarwal further explains that many accounts that look fake on the surface are actually real. For example, some real people may have no profile picture or post odd tweets, making it look like a bot to a casual observer internally. Twitter could see that this account tweeted a regular cadence from the same ip address at regular times of the day. This suggests that it was a real person.

On the other hand, if it's tweeting from a bunch of different ip addresses around the world at irregular times. In the middle of the night, there's a pretty good chance that it's a bot there's a careful balancing act between kicking the bots off the platform while at the same time, not accidentally shutting down the counts of real users. The professional spammers constantly innovate and come up with creative ways to fly under the radar. This makes it almost impossible to completely get rid of them, while musk's sample of 100 twitter accounts is considered by most experts to be not scientifically rigorous.

There have been some more sophisticated attempts by outside organizations. A 2017 study from the university of southern california estimated that 15 of twitter users are bots, but outside observers have no way of knowing what twitter classifies as monetizable daily active users, which is the relevant number for the five percent sadistic. So by construction, it's almost impossible for an external study to debunk twitter's claims to twitter's credit. They have increased their efforts to crack down on bots.

In recent years. In 2018, they launched a huge campaign. Shutting down 70 million suspicious accounts right off the bat, but if you're a regular twitter user you'll see that there's still a lot of work left to be done on this front. If musk remains unconvinced about the number of fake users, is there any way that he can back out? After all, he's already signed a contract with the company and called the 54.20 buyout price? His final offer, the stock market, is discounting a significant probability of the deal falling through with the share price now 30 below the agreed upon price.

Large transactions like this require significant legal and advisory fees and are a major time commitment to the senior management teams which distract them from other priorities if the buyer pulls out at the last minute. All this goes to waste because of this companies selling themselves generally formulate airtight contracts to make sure that the deal gets done and twitter was no exception. In the agreement that musk signed to acquire twitter, he explicitly waived his rights to due diligence and can only back out the deal under very specific circumstances. He has to show that twitter's claim of less than five percent of monetizable daily active users being bought was a misrepresentation and that had a material adverse effect on twitter's value.

This is a very high bar to prove in court. If musk backs out of the deal without proving material adverse effects, he would be liable to pay a one billion dollar breakup fee, while one billion dollars is a large sum in absolute terms, is less than three percent of the deal value in less than one percent Of his net worth, but walking away from the deal isn't quite as simple as paying the one billion dollar fee. Twitter would have the right to demand the one billion dollars, but they don't have to. They could take musk to court and compel him to complete the merger.

Musk signed a binding agreement and without a material adverse effect, he is obligated to buy the company for 44 billion dollars. Given that the deal price is 14 billion dollars higher than the company's current market value, it seems very unlikely that they would accept the 1 billion fee. While it's difficult to predict how the potential legal case would play out prior president tends to favor the seller. In november of 2019, the french luxury conglomerate lvmh signed a definitive agreement to acquire jewelry company tiffany for 16.6 billion dollars.

Before the deal closed, the pandemic hit, tiffany's stores were shut down and their sales plummeted. Lvmh tried to pull out the deal saying that the pandemic constituted a material adverse effect on tiffany tiffany, then sued lvmh, saying that the french conglomerate was obligated to acquire them. According to their definitive agreement after months of the two companies lawyers wrangling against each other, they finally came to an out of court settlement. In light of this, once in a century pandemic, tiffany agreed to decrease the acquisition price by a grand total of three percent.

After considering all the legal fees, lvmh barely broke even on this negotiation, if anything musk's case is weaker than lvmh's twitter's problem with bots has been well known and covered by the media. For many years, the filing which claimed bots were less than five percent of active users, was released before he made the bid. Musk's sudden objection to the deal was based purely on public information available before he signed the agreement. It also doesn't help they formally waived his rights to post deal due diligence.

Musk said that economics has nothing to do with this twitter, buyout and being the world's richest man. He has more than enough money to pay the 44 billion dollars if he really wanted to. So why is he now trying to pull out? The vast majority of his wealth resides in his 21 stake in tesla, which is valued at 140 billion dollars. It is estimated that he has used 88 billion dollars or more than half of his stake as collateral to take out margin loans.

He uses the margin loads to fund his personal expenditures as well as his other ventures. So while he is technically worth about 200 billion dollars, he doesn't just have this sitting around as cash if he tried to borrow the entire twitter buyout by borrowing against his tesla stake. This would put him in a very vulnerable position. If tesla's stock price continued to fall, he could get a margin call and his creditors would forcibly liquidate his position at the lows to avoid this musk lined up seven billion dollars of financing from other investors, including billionaire oracle, founder larry ellison, a saudi prince, a qatar Sovereign wealth fund and a few others, he convinced these investors to come on board by proposing a new business plan to 5x twitter's revenue over the next five years by diversifying it beyond advertising.

This includes making corporations and governments pay a fee to use the platform. He also wants to expand twitter's functionality to include a mobile payment function similar to the popular wechat app in china. While these plans might have merit it's an uncertain proposition, to say the least, he will fuel this growth by implementing extreme work ethic expectations for twitter's employees. Although he assures them, there will be far less than any demands of himself in the weeks after musk signed the agreement.

Social media stocks have tanked snapchat, which is one of the most comparable companies to twitter declined by 40. Since the twitter deal was signed, the 54.20 buyout was a 40 premium to twitter's share price before the mustang was revealed, but it's probably an 80 premium to where shares would be trading had must not got involved. A significant portion of the twitter buyout will be funded by debt with the fed raising rates, financing costs have soared, the higher interest, expense will decrease the expected gains for the investors and finally, tesla's share price has been taking both because of the general market sell-off and Because people fear that musk will divert attention away from the car company to focus on twitter. This makes it riskier for musk to take out more margin loads against this twitter stake and makes it all the more important to bring on other investors if the other investors, bail, musk, still has the means to pay the entire 44 billion on his own.

In a worst case scenario, a court would compel him to complete the transaction and he'd be forced to dump almost one third of his tesla stake at the lows. The walls are closing in and he's likely using the bot issue as a negotiating tactic, to pressure twitter's board to accept a lower price. Musk's options aren't really that great twitter has the most negotiating leverage in this case, so he's unlikely to get a significant price cut. If he does manage to pull out the deal, probably the best outcome is he pays 1 billion dollars of breakup fee to make matters worse, he is still under scrutiny from the sec related to his 2018 funding secured tweet.

If he pulls out the deal - and it looks like he never intended to buy the company in the first place, this could be viewed as market manipulation and the sec investigations will escalate further, even if he could avoid criminal liability. His reputation would take a large blow. It would be very difficult for himself or tesla to make any acquisitions in the future. For these reasons, it looks like musk's bot criticisms are a negotiating tactic to bring down the price and, to some extent it looks like it's already working with the share price down.

26 percent from the highs with a stock now at 38 dollars, it's possible that the board will cave and accept the price lower than 54, but higher than 38. But this is by no means a sure bet: alright, guys that wraps it up for this video. Do you think musk will follow through with this twitter buyout? Let us know in the comments section below as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.