Twitter's Refusal to Address its Fake Account Problem is Holding the Company Back Costing Shareholders Billions
Elon Musk's breakup letter to Twitter reveals that its Board and Executives aren't lying about the platform's fake account problem but are, instead, willfully ignorant about its true extent.
By Alexander Muse ¡
Like many Americans, I was excited about the prospect of the worldâs richest man returning Twitter to its founding principles. I was so excited that in April I wrote a piece here on Substack titled, âCan Elon Musk Save Democracy?â imagining how Elon would return free speech to the platform. Before long it was clear to me that the deal would never close, thoughts I shared in a series of articles. Today Elon Muskâs lawyer, Mike Ringler confirmed my fears in an eight-page breakup letter to Vijaya Gadde Twitterâs general counsel1 announcing that the billionaire had decided to terminate the merger agreement.2
THE RELUCTANT BRIDE
In hindsight, we can all agree that Elon Muskâs offer of $44 billion drastically overvalued the company. In that light, youâd imagine Twitterâs senior management and board of directors would be bending over backward to give Musk everything he needed to close the transaction - praying Musk would close. Instead, reading through Ringlerâs letter it was clear Twitter was throwing up roadblocks at every turn. One gets the impression that Twitter was trying to run out the clock on the assumption that Elon would be forced to close.
For example, it took Twitter two weeks after Muskâs explicit request for access to the firehose to finally agree to give his team access to the APIs.3 Twitter failed to mention that they had rate-limited the APIs preventing his team to complete their analysis in a reasonable period of time. Only after Musk complained did Twitter relent and give his team the same level of access provided to the companyâs largest enterprise customers. While Twitter removed the rate limits, it did not disclose the APIs included a cap on search queries. Muskâs team struggled until they realized Twitter had placed an artificial cap on the number of searches his team could perform. Musk notified the company in a June 29th letter that the cap was preventing his team from conducting their analysis. The cap was finally removed on July 6th after Musk personally demanded its removal for a second time. Twitterâs senior executives and board of directors were not acting like they wanted this deal to closeâŚ
THE OSTRICH IN THE BOARD ROOM
Reading between the lines of Ringlerâs letter, it is clear that Elon believes that Twitterâs senior executives and board of directors fear the company has a far bigger problem with fake accounts than they are admitting to themselves much less reporting to the SEC or to their advertisers. Ringler doesnât accuse the companyâs board or senior executives of fraud, instead, he implies that they are purposefully hiding their heads in the sand. They can represent that fewer than 5% of their mDAUs4 are fake because that is what theyâve been told. Twitterâs senior executives and board of directors are not doing anything to challenge that number because doing so would undoubtedly result in an SEC investigation and lawsuits from both their shareholders and advertisers.
Musk pressed the board and senior executives as recently as June 17th to explain their understanding of Twitterâs mDAU metric and its calculation. Musk wanted to know what materials they relied on when they made their >5% representation to shareholders, advertisers, and the SEC. To that end, he requested copies of the materials - a request that was repeatedly ignored. Based on a fair reading of Ringlerâs letter Musk was convinced Twitterâs senior executives and board of directors had no meaningful understanding of the companyâs mDAU metric.
Personally, I have been guilty of this particular sin. There were times when my team would give me numbers that seemed too good to be true. Before I challenged them I would often stop myself, allowing myself the option of using those questionable numbers in a pitch. Of course, it never ends well. You start believing your own bullshit and prevent yourself from fixing the problems that are holding you back. What if this is what is going on at Twitter?
I believe that Elon Musk is convinced Twitterâs senior management and board of directors are deliberately hiding their heads in the sand and donât want to understand the true size and scope of their fake account problem. Elon has LONG complained about the platforms bot problem and heâs not alone - most users cite malicious bots as their biggest frustration with Twitter. Elon understood from the start that Twitterâs fear of disclosure was preventing them from actually addressing the problem. Forget about the lawsuits and the investigations - Twitter is worried that if they actually solved their bot problem theyâd likely lose half of their advertising revenue.
In that context, Elonâs earlier statements about relying less on advertising and more on user fees make more sense. Taking the company private would give it the breathing room it needs to understand and solve its bot problem. The company would no longer need to disclose its mDAUs publicly and could work to replace any loss of advertising revenue privately. Twitter claims they suspended 1,000,000 or more bot accounts each day - by simply charging users a nominal fee of say $1 for each account they create the company could eliminate that particular bot problem. There are likely far better options but the fact of the matter is that until the company can admit it has a problem it wonât be able to solve it.
THE OLIVE BRANCH
In the letter, Ringler reveals that Musk not only wanted to dig into the data relating to the suspension of fake accounts but also the suspension of real accounts. Specifically, in his May 19th diligence request Musk asked for data that would allow him to determine how many real accounts were suspended on a daily basis starting one month before the 2020 presidential election to the present day. Additionally, he wanted the internal reason for each suspension (suspensions are noted by type in Twitterâs system). Clearly, Musk had suspicions that he wanted to confirm or debunk. By June 30th Twitter made it clear the company would NOT provide the data or the methodologies employed to identify and suspend such accounts. It is likely that the numbers are shockingâŚ
THE FOUR REASONS FOR TERMINATION
No. 1 BREACH OF THE MERGER AGREEMENT: Ringler stated that Twitterâs refusal to provide certain data and information to Muskâs team was in violation of their contractual obligations under Sections 6.4 and 6.11 of the Merger Agreement. Muskâs team first requested the data and information on May 9, 2022, and as of the date of the letter had not received the necessary information. Ringler supported this claim by citing a June 20th letter from Twitter explaining that the data and information Twitter was agreeing to provide would be âinsufficient to perform the spam analysis that Muskâs team purports to wish to do.â Musk formally notified Twitter on June 6th that they were in breach of the agreement and since then the companyâs cure period has expired allowing Musk to exercise X Holdings I, Inc.âs right to terminate the Merger Agreement and abandon the transaction.
No. 2 MATERIALLY INACCURATE REPRESENTATIONS: Twitter represented in Section 4.6a of the Merger Agreement that no documents the company filed with the SEC included any âuntrue statement of a material factâ. In their SEC filings, Twitter claimed that once an account is determined to be spam, malicious automation, or fake they stop counting it in their mDAU. However, Twitter admitted on June 30th that its mDAU number actually includes accounts that have been suspended contrary to the representations made in their SEC filings. In fact, not only do they include suspended accounts in their mDAU, Twitterâs system for calculating its mDAU is arbitrary and ad hoc despite representations made in their SEC filings that their process for calculating mDAU is reasoned. Both claims made in the companyâs SEC filings are either false or materially misleading - grounds for rescission of the Merger Agreement.
No 3. COMPANY MATERIAL ADVERSE EFFECT: As a result of the companyâs false or materially misleading representations the company is likely to suffer from a Company Material Adverse Effect providing for an additional basis for termination of the Merger Agreement under Section 7.2(b)(i). Muskâs advisors believe the true number of false or spam accounts is substantially higher than the 5% represented by Twitter in its SEC filings - the revelation of which, given that the company generates 90% of its revenue from advertisements, could spell disaster for the business.
No 4. FAILURE TO OBTAIN CONSENT: Section 6.1 of the Merger Agreement required Twitter to obtain Muskâs consent prior to firing two key, high-ranking employees (Revenue Product Lead & General Manager of Consumer), laying off a third of its talent acquisition team, and instituting a general hiring freeze. Twitterâs failure to obtain Muskâs consent as required under Section 6.1 constitutes a material breach of the Merger Agreement further justifying rescission.
CONCLUSION
I believe that Elon was well aware of the true extent of Twitterâs bot problem prior to making his bid for the company. In fact, I think during his private discussions with Jack Dorsey he saw the companyâs unaddressed fake account problem as an opportunity to unlock the companyâs growth potential. By taking the company private heâd be free to address the bot problem in private without having to publicly disclose the companyâs dirty laundry. I honestly believe he thought he could unlock the companyâs true potential by fixing the problem. But when the market collapsed I believe he, rightly, recognized he was dramatically overpaying for the company. Combine that with the companyâs lack of cooperation and overt hostility and there was no way that Elon was going to close. I sincerely doubt that heâd consider closing even with a $10 billion discount at this point - but I could be wrong. My advice? Donât bet against ElonâŚ
MEANWHILEâŚ
Twitter CEO Parag Agrawal is reportedly telling employees that heâs âGOING TO WAR TO FORCE ELON TO BUY TWITTER, BOTS AND ALL!â5
Twitterâs Chairman feels similarly:
My prior coverage of the deal:
Monetizable Daily Active Twitter users (mDAU)
