The $44 billion bid Elon Musk made to buy Twitter is one of the largest purchase price offers in recent history. However, as the situation currently stands, Musk is now attempting to reneg the deal. Through examining what went wrong on such a large scale, we can learn important lessons and apply them to transactions of all sizes.
1. Never Skip Due Diligence (DD)
One of Musk’s more serious missteps was that he signed a legally binding contract saying he would purchase Twitter prior to conducting valuable and thorough DD. Currently, Twitter is claiming that less than 5% of their active user base are bot accounts, but Musk is counterclaiming that the true figure is substantially higher. So much higher, in fact, that it warrants the contract to be null and void. However, had Musk conducted thorough DD prior to signing the contract, and not dismissed existing sources of DD, he may have noticed areas of Twitter he deemed were warranting a second guess or further investigation before forming legal commitments.
2. Be Cautious Against Classic Warning Signs
When looking for a company to purchase, be very cautious against entering into purchase contracts with companies that exhibit the classic warning signs. For Twitter, it reported an annual net income loss of $221 million in 2021, and $1.136 billion loss in 2020. While the COVID-19 pandemic undoubtedly affected many businesses, looking at the history of Twitter’s annual net income reports should raise red flags that there are flawed aspects of the platform that would need to be properly addressed post-purchase.
3. Give Both Parties Time to Consider
Despite the warning signs, Musk was set on buying Twitter. After his initial offer was rejected, he proposed a higher sale price (with a condition that Twitter would not be allowed to view other offers) and increased his share ownership. With their responsibility to shareholders and wanting to avoid a hostile takeover, his strategy forced Twitter into a difficult position to where Musk essentially became their only option. While Musk’s strategy wouldn’t be applicable to private businesses, the impatience to finalize the deal is something that private sellers and buyers should be cautious about.
Oftentimes, when a high-value deal with some restrictions is presented, it can be very difficult to weigh those restrictions with warranted importance. Commonly known as FOMO, or “fear of missing out,” sellers and buyers may make snap decisions on offers that have a fantastic price, even if the price is contingent on expediting the deal or on not viewing other options. While a good price is always a goal in transactions, be wary of deals that aim to occur so quickly that you sacrifice carefulness or quality of DD by falling victim to FOMO. Additionally, consider why the other party may want to fast-track the deal or block you from looking at other options. This may help with ascertaining whether they are someone you truly wish to conduct business with.
4. Consider the Buyer’s Intentions
While Musk’s strategy did force Twitter into a difficult position, there is a lesson to be learned for sellers about considering a buyer’s intentions. Musk has a history of being associated with pump and dumps, with many individuals now wondering whether Musk is conducting a similar scheme with Twitter. On May 26, speculation rose to legal action, with Twitter shareholders presenting a class-action lawsuit against Musk over alleged stock manipulation due to the tumultuous Twitter acquisition process. As of June 8, given the filings, it appears that this lawsuit may go to court. Though accusations of market manipulation are simply accusations at present, it may still be too early to tell whether Musk’s intentions align with his statements.
For sellers, checking into a buyer’s history can help prevent entering a potentially disastrous deal, and it is strongly encouraged that both the buyer and seller research one another to ensure that their goals align.
5. Do Not Sign Legally Binding Contracts Before Careful Review
When Musk opted to skip his DD and sign a contract committing to a sale, this became the point of no return. At present, this legal contract prevents him from simply backing out of the deal and paying no breakup fee, despite being the avenue Musk is pursuing. Twitter also announced that they will be suing Musk to enforce the terms of the contract, and will likely significantly increase the current breakup fee of $1 billion to reflect the large drops in their stock’s price.
6. Stay Honest
One of the reasons why Twitter is adamant to have Musk follow through with the purchase is because they do not view his reasoning for not following through as valid. Musk has complained that there are more bots on Twitter than the company reported, but Twitter claims that they stated that the actual figure may be higher than their presented estimate and they provided Musk with all of the raw data they had. Additionally, Musk negotiated the Twitter deal on April 23 and 24, signing on April 25, not nearly enough time to thoroughly investigate. These facts, examined together, tell Twitter executives that Musk simply failed to conduct his DD, was overconfident in his decisions, and is now attempting to find a loophole to invalidate the contract he hastily signed.
While this speculation may not be harmful to a person of Musk’s power and wealth, both sellers and buyers must maintain honest and clear communication to uphold a good reputation. If either party is dishonest or difficult to work with, this reputation may precede them and block off potential future avenues.
Regardless of deal size, reputation can mean the difference between successful sales, or being turned away from every route you pursue. Acting in good faith, with honesty, integrity, and accountability for one’s mistakes, is a critical component of being a good transaction partner. Additionally, when mistakes are made, learning from them can help prevent serious problems and pitfalls in the future. For one of the wealthiest people, paying billions of dollars for a breakup fee may not present a large problem, but for smaller buyers, the amounts they would have to pay can quickly put an end to their future acquisition endeavors.