Special Report: Elon Surrenders?

Scott and Prof G Media’s EIC, Jason Stavers, discuss the nuances of Elon Musk’s latest move: a promise to proceed with his deal to acquire Twitter after all. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:48Speaker 01

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• 1:26Scott Galloway?

  Okay, welcome to a special episode of the Prop G Show. We are talking about the big news this week, and that's Elon Musk telling Twitter he wants to buy the company after all. We saw this as the end of the saga and a win for the rule of law. But after speaking with our editor-in-chief, Jason Stabbers, who is a former corporate litigator, there's some nuance here. So we're doing a special episode about some of the wrinkles regarding the situation. We're getting this out as quickly as possible, but it's clearly an evolving story, as Jason will explain. Jason, what do you think is going on behind the scenes here? Why has Elon had a change of heart? Well, Scott?

• 2:06Speaker 02

  As you know, the consensus among legal observers for some time now has been that Elon has very little chance at trial. Certainly, that's been my view and yours as well. And trial is scheduled for October 17th. So that's a pretty important deadline. But I think what was happening more immediately was depositions. So both Elon and Twitter CEO's deposition were supposed to happen last Monday. Media reported that lawyers were flying across the country and depositions were canceled at the last minute. There's been a lot of gamesmanship around these depositions. But Elon was scheduled to start his deposition tomorrow. So being deposed is an incredibly unpleasant experience, and it's also a highly risky

• 2:47Speaker 02

  one for somebody who is across as many complex and potentially controversial matters as Elon is. So I can't tell you exactly what's going on behind the scenes on Elon's team, but I can tell you generally that he's probably been in deposition prep this week and maybe late last week. And deposition prep is quite uncomfortable. What they're going to do is they're going to bring in a lawyer who Elon hasn't met, but who has experience as a prosecutor and who takes a very tough approach. And they will sit down across the table from Elon, and they will go through all of the bad documents, all of the things that make him look bad, all of the ways he could lose his case. And that lawyer will give him the roughest possible questioning. Elon does not have a great track record in depositions. He was deposed in the lawsuit

• 3:32Speaker 02

  over SolarCity and in some others. He tends to get testy. He tends to get snarky. Judges don't like that. And an experienced investigator can use that to their advantage and essentially bait somebody into making admissions or statements that'll hurt them in court. So depositions are rough. And there's always the risk that there's more behind the scenes in discovery that Elon doesn't want made public. We saw already a bunch of sort of cringey, embarrassing stuff in the released text messages. There might be quite a bit more in material that Twitter has now obtained and would use in that deposition and then potentially if Elon has to sit for testimony at trial. So I think the threat of being deposed and having to expose himself to that kind of questioning

• 4:16Speaker 02

  under oath is probably a significant factor in this change. And the last thing I'd say is that there's been a lot of discovery disputes. The parties are fighting over who gets which documents. And those all come to a head right about now. So there could be motions ready to be filed seeking sanctions. There could be further breakthroughs in terms of public disclosures of documents that Elon might find embarrassing.

• 4:40Scott Galloway?

  Yeah, we so Jason was part of we do an editorial call and Jason outlined this view that he the thing that probably pushed him over the edge here to try and at least publicly say that he wanted to move to the deal and delay or suspend the trial was the threat of deposition. And that just it just rang so true because one, he's got his hands in a variety of very controversial pots and two, he has a habit of lying. And it seems to me that just these questions under oath would get increasingly uncomfortable for a guy who's used to the luxury of being able to say anything and people applaud it and take it take his word as truth.

• 5:24Scott Galloway?

  So what do you make of Elon's letter or the letter his counsel sent on his behalf? Does this end the dispute?

• 5:32Speaker 02

  Yeah, so let's take a look at the letter. The letter is from Elon's lawyer. It's not from Elon. It's not signed by Elon. It's not under oath or penalty or perjury. And all it says is that Elon has agreed to close the transaction as contemplated in the merger agreement on the conditions of the merger agreement pending receipt of the proceeds of the debt financing, meaning the $13 billion that Wall Street banks have planned to raise in debt, provided that the Delaware Chancery Court enter an immediate stay of the action, adjourn the trial and all other proceedings. So essentially Elon's lawyer is asking Twitter to unilaterally disarm, right? They have Elon about to sit in a deposition chair.

• 6:16Speaker 02

  They have trial scheduled to begin October 17th, a trial that they are almost certainly going to win. And Elon says, hey, how about this? How about you unload your gun? You put it down, maybe lock it in a safe. And then we'll just go back to the way it was. And I would be very surprised if Twitter and Twitter's lawyers accept this on its face value, because Elon's track record in relationship to Twitter is not good in terms of his trustworthiness. So the timeline here, on March 26th, Elon had already become the largest individual shareholder of Twitter, but he hadn't filed anything with the SEC. So he'd been secretly buying Twitter stock for months. And he said publicly on Twitter that he was seriously considering building a Twitter

• 7:01Speaker 02

  competitor. So that was probably his first significant misrepresentation, because he wasn't thinking of buying a Twitter competitor. He was planning on buying Twitter. Then, behind the scenes, he agreed to join the board, said publicly he was going to join the board, and six days later, again, changed his mind and said he wasn't going to join the board. A few days after that, on April 14th, he offered to buy the company. Then, in May, he said the deal was on hold. And then in June, he said he was walking away from the deal. So Twitter's not going to trust Elon. He's not trustworthy. And so they have the most leverage they've had over Elon throughout this entire process right now. And I don't think they're going to just set that leverage aside.

• 7:43Scott Galloway?

  I love that, that he's basically, this letter isn't as much an agreement to close. It's a request for Twitter to unilaterally disarm. I thought that was very interesting. How do you think Twitter responds here?

• 7:56Speaker 02

  So Twitter needs much better assurances than Elon's word, which hasn't been proven to be worth all that much. And I think the two places that they're going to need Elon to go are going to be, first of all, he's got to give up his defenses to the contract, right? So he has made these claims that Twitter has been dishonest and misrepresented the bot situation on the site. Now, as a legal matter, that probably doesn't get him out of the contract anyway, but he's at least ginned up this whole court case around it. So they're going to need him to say, you're right. I can see, under oath, that the bot thing does not get me out of this contract. And then I think, and anything else that he's thrown at them since this lawsuit began around the whistleblower that we saw a few weeks ago, whatever his theories are as to

• 8:41Speaker 02

  why he's not bound by this contract, they're going to need him to acknowledge those theories are bogus. The other thing they're going to need is for him to put himself in some sort of legal jeopardy around actually closing this deal. They've already taken him to court once. They're spending tens of millions of dollars on legal fees. They're not going to want to do that again. So there are a couple of ways to do that. He could put up a bond. I think that's unlikely. I think more likely is they'll expect him to actually settle this case with an agreed upon schedule that the court can enforce. So apparently putting himself at the mercy of the Chancery Court, or even agreeing to a judgment. If he agrees to essentially concede the case and Twitter obtains judgment, Twitter can secure that judgment against him in any number of ways. They don't even have to necessarily

• 9:25Speaker 02

  go back to Delaware. They can secure it against him in his home of Austin, Texas, or San Francisco, California, or wherever he claims to live. If there are courts on Mars, they can enforce the judgment there. So they're going to need some significant assurances that he's going to do what he said he was going to do.

• 9:42Scott Galloway?

  So if they reach an agreement, does this deal close? Is it a done deal?

• 9:47Speaker 02

  Well, I'll tell you, I think it really does look like this deal is probably going to close, but there are some pretty significant obstacles left because there is the question of the $44 billion. So the way this deal is supposed to work is he raised $13 billion in debt from a bunch of Wall Street banks. But that debt was secured back in the spring when interest rates were much lower and the market for corporate bonds was much healthier. So on the Markets Pod, we reported on this Citrix deal where banks are losing hundreds of millions of dollars because they wrote the terms of debt at the beginning of the year, and now they're actually trying to sell that debt in the marketplace. Exact same situation here, but worse, because not only has the macro situation changed against debt,

• 10:30Speaker 02

  the micro situation has changed because Elon has spent the last six months telling everybody that Twitter is a scam and has been lying to the SEC. So who's going to want to loan money to somebody with the security being Twitter? So these banks are on the hook. They have to give Elon the $13 billion unless they can get out of the contract. So it's not out of the question that Morgan Stanley and some of these other banks might turn around and sue Elon and say that he's violated the contract. I think that's unlikely, but it's not outside drum of possibility. Then the other tranche of the the deal is the $33 billion in equity that Elon is personally on the hook for. Now, he doesn't have $33 billion in cash, right? He sold some Tesla to free up some cash, but he has nowhere near that much in liquid.

• 11:14Speaker 02

  And I don't think he wants to sell another $20 billion in Tesla stock, which is why, as we saw in the text messages, he's borrowing it from his buddies. But those are all, at this point, probably not contractually obligated. So he has to go and try to get 10, 20, 30 billion dollars from billionaires and investment funds. And again, he spent the last six months telling everybody that Twitter is a terrible company that's got serious problems. So we'll see if he can just text Larry Ellison again and say, hey, I need that $2 billion now, buddy. He might have to take up his friend Jason Calacanis's offer to, as Elon put it, market an SBV to randos in order to raise enough money.

• 11:57Speaker 02

  And the answer to both those problems, the answer to the debt problem and the answer to the equity problem, is that Elon has to shift from the trying to get out of the deal Elon to salesperson Elon. And Elon is pretty good at selling, and that's what we're going to see. We're going to see Elon talking about the potential for Twitter, the opportunity for Twitter, how he in fact can fix Twitter. And if he can convince people that it's worth investing in, then he might still be able to salvage something out of this deal.

• 12:24Scott Galloway?

  Just to summarize here, and the reason we're here is I thought the real nuance and the insight was that this letter that claims to say he wants to move forward is nothing but a claim that lacks veracity from a person that makes claims and then or makes promises or says things that he doesn't always live up to, that there's a lot of sunlight between what he says he's going to do and what he actually does. And in exchange for that claim of interest to move towards a close, he wants Twitter to disarm unilaterally, to suspend the case. And in your view, it's unlikely Twitter will do that until there is additional handcuffs

• 13:05Scott Galloway?

  on him, if you will, or additional legal enforceable agreements from the Musk side that they are going to close. Is that about accurate?

• 13:14Speaker 02

  Yeah, that's exactly right.

• 13:16Scott Galloway?

  Jason, thank you so much for this. This was really, this was super interesting. This has been a special report on the must-drama. Additional nuance bringing inside like the disc to the co to the disco. What a thrill. We'll see you later in the week.

• 13:41Speaker 03

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