Due Diligence: Seek the Truth and Honor Agreements

May 24, 2022

The $44 billion potential acquisition of Twitter by Elon Musk has been a fascinating story to follow for me, as a mergers & acquisition intermediary who has been facilitating deals in the technology sector since the 1990’s, from a strategic execution, negotiating, and acquisition administrative procedure perspective. Many of the issues discussed in the media related to the deal have direct correlations in the Middle Market and Main Street transactions facilitated by IBA on a monthly basis as the largest and most productive business brokerage firm in the Pacific Northwest.

The recent issues of focus in the Twitter deal have been the due diligence being conducted by the Musk team and whether the results of that assessment can be shared in the public domain.  One of the underlying value premises related to Twitter as a company is its approximately 229 million users and the ability to monetize that customer base through engagement with that group via advertising and other methodologies.  Twitter conveyed publicly that less than 5% of its several hundred million users are “false or spam”.  However, researchers estimate 9 to 15% of accounts are automated or bots, so engagement with those accounts is problematic from a revenue/profit generation perspective. Cyabra puts the percentage of inauthentic accounts at 13.7%.  https://www.news18.com/news/tech/do-spam-bots-really-comprise-under-5-of-twitter-users-elon-musk-wants-to-know-5172499.html

If every 5 million users monetize individually at an average of $5 a month ($60 a year), the result of each drop of 5 million accounts to engage with in a sales capacity is $300,000,000 a year, meaning if Cyabra is correct, the difference between what Twitter claims and reality could be approximately $500 million a year in revenue.  This is a material difference worthy of discussion between the parties.

The dynamics of the Twitter situation are different than a scenario where a business is proactively put up for sale and marketed to potential buyers, but an underlying premise is relevant in both cases. The premise is that an environment of full disclosure and transparency should be created in any transaction from Wall Street to Main Street. Buyers deserve the ability to make a business acquisition decision from a foundation of accurate information and comprehensive knowledge.  Information that can impact the future performance of the company from customer concentration to deferred capex to pending retirement of key employees needs to be disclosed.  If a buyer proceeds forward with a clear assessment of the attributes and challenges facing the company they can be expected to assume responsibility for the future performance of the company in the marketplace.  However, if information is concealed or not disclosed then seller beware, post transaction, buyer litigation has a possibility of showing its ugly head and resulting in an expensive lesson appropriate for those who don’t demonstrate integrity and honesty in their business dealings.

The next question raised in the Twitter acquisition by Elon Musk scenario is whether information learned during due diligence can be shared in the public domain. https://www.cnn.com/2022/05/15/business/elon-musk-twitter-nda/index.html It is my professional opinion that information learned during due diligence should not be shared in the public domain by a buyer.  In virtually all business sale transactions, the buyer will be asked to execute a confidentiality agreement to gain access to detailed & insider information about a business.  The information is only shared because of this binding agreement with legal implications upon violation in an attempt to persuade the buyer to complete an acquisition. The information would not have been shared with an outsider for any other reason.  The best deals are made between parties that know, like, and trust each other.  Sharing information outside of the group trying to do a deal erodes trust and puts the deal in jeopardy.  A buyer seeking a “win-win” transaction in a “good faith” negotiation would never share the information.  Sharing information in most situations learned during due diligence to people outside the constraints of the NDA in place has the ability to damage a company in a variety of ways from employee retention to securing customer sales to obtaining commitments from suppliers or landlords.   Making announcements in the public square is rarely done by a party desiring to complete an acquisition unless in “bad faith” they are tyring to sweeten the deal through applying pressure on a seller who may be forced into a damage control position by the action.  In a perfect world, a sale is not disclosed in the public domain until it is a certainty and messaging can be strategically managed to the maximum benefit of the business.

Elon Musk’s messaging to the employees of Twitter throughout the negotiation/acquisition process has also been an interesting dynamic to watch.  Each company has its own corporate culture.  The question is whether a corporate culture is a benefit or detriment to company performance.  A business with a culture of caustic relationships between departments and low productivity can be attractive in the marketplace to those who believe staff morale and performance can be improved through superior management.  Alternatively, a company with a corporate culture where the team would run through a glass wall for executive leadership is often hard to keep moving forward with the same velocity & conviction if key members of the management team depart post sale.

The acquisition of a business is a sensory activity.  It requires review of information with the eyes; listening to feedback from customers, suppliers, and employees; touching and inspecting the product or service provided; and in appropriate industries smelling and tasting deliverables.  A quality due diligence process benefits both sides of a transaction.  A professional mergers & acquisitions intermediary has the ability to manage and facilitate the process to insure it is productive & timely. This is true whether you are buying Twitter for $44 billion or a neighborhood cafe for $440,000.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.