Twitter and lessons in Game Theory

Twitter’s soap opera is entertaining for some, a distraction for others, and a lot of grapevine for business media to report.

It offers some useful lessons for those who look at business and strategy with a game theory lens. This is a light-hearted, largely opinionated perspective by a layman for lifelong learning from others' actions. I have written about Twitter's progress before here and here

Alternative perspectives are welcome. Arguments rubbishing these ideas and scenarios would be equally fun as they widen the view.

Since the background of the game is well known to everyone, let's dive into the game, its players, settings, and early moves and moves ahead. Making predictions is always fun. But, writing them down and re-visiting them is always humbling to check your gut feeling.

Players of the game:

• Elon Musk (EM)
• Twitter's board of directors (BoD). Bret Taylor, Chair of the board and Co-CEO, Salesforce.
• Twitter’s shareholders
• Jack Dorsey (JD)
• Twitter's current CEO Parag Agarwal.

There could be more players like - Tesla's shareholders, Twitter employees, other large investors who were committing to the deal’s financing, etc. But, let’s keep it simple for the time being.

Early Moves

Move 1 - EM

As the largest individual shareholder with 9%, he announced that he would join the board. The share price jumped and some would have profited well based on mere news making.

Move 2 – EM

Now that the profits were made, EM retracted his move 1. He announced that he would not join the board because it is not enough to save Twitter. Rather, he would go all-in to buy it. Take it private and do whatever it takes to save the voice of humanity. It is unlikely that move 2 was not planned ahead of move 1. They were merely spaced out to maximize the gains.

EM made his offer of US$44B. But during this process, he also trashed and trolled the BoD. Humiliating them. This is probably part of the tactics to support move 2 and make it difficult for the board to have a constructive discussion.

Some buyers always prefer bulldozing a discussion over negotiating. But, it may have hurt in return, as well. We will look at it a little later again.

The offer price was $54.20. The market price in those days was around 44 or so. Having cooled down from the announcement of EM joining the board where it reached a high of near-50.

Thus move 1, was not only to profit well but also helped to assess what’s the upper limit in the immediate short run. A pretty good pre-move before you move in with your real move.

Move 3 - BoD

Now, in the hindsight! What would you do if you were role-playing for the board? The options could have been – 1. Decline and defend with a better plan 2. Get to the table to negotiate or 3. Accept.

Option #1 would have required a lot of hard work for the BoD to come up with a detailed and credible plan to create alternatives. Attractive enough for shareholders and viable enough to be considered against a real offer. Well, the board wouldn't have the urgency of that given the board collectively does not even own a 10th of what EM owns of Twitter. He has far more skin in the game. He cannot let go of this without a bigger battle.

Option #2 was already blocked because of the ugly public communication tactic of not having a civil negotiation. Why not? That is for ordinary mortals. If price manipulation was not the only reason for move 1 + move 2, then there it was. He did not join the board because it would require sitting together with the rest of the board and fixing Twitter. That is, working with others as equals. So if you cannot sit with them on the table on the same side, why waste time sitting on the other side of the table, negotiating.

However, the BoD has a fiduciary responsibility to act in the favor of the shareholders. There was neither enough time nor enough breathing space to work on a well-defined plan.

IMHO as a layman, a simple YES was actually a very smart move by the BoD. Almost a no-brainer. This was not a deal proposed to be made. With that assumption as the buyer’s motive, it was even easier for the BoD. By accepting the offer, the board achieved multiple objectives. 1. No need to waste time coming up with another plan to decline the offer. 2. No need to waste time and energy negotiating. 3. Fulfil their responsibility in the favor of shareholders with a premium on the current price.

Accepting the offer was a win-win. Transfer the problem back to EM. So he needs to find the money. He needs to get the work done and make it happen (a simplified version).

The small fee of $1B, for the failure of the deal, is probably one of those unspoken mutual agreements between BoD and EM. Even mafia wars have unspoken agreements based on the non-documented rules of the game - This deal is highly unlikely to happen so don’t make the cost of failure too high for either side when it fails.

In hindsight, if EM never wanted the deal, did he and his team quote the price a little too high? If he would have offered a bit less, would it have made BoD’s life easier to decline or more difficult to accept the offer? We will see as the game progresses. But, that's how hindsight works. Most had not seen the upcoming public market valuations drop for tech cos. At least to the extent they did.

Move 4 - EM

EM has confirmed to not proceed with the deal.

Both sides will cry foul. The outcome would be a high-voltage legal battle. Lawyers must be celebrating all through the weekend to get to work from Monday.

The BoD has announced publicly that they would take full legal recourse to ensure the deal is honored. Well, on this one almost everyone agrees there is very little one can do to make a buyer buy the goods once they have decided not to. Or can you? You can do other things though.

What would you do as BoD?

Move 5 - BoD

Twitter BoD has no choice but to go and do necessary legal work and insist: 1. Deal is honored or 2. Failing to do so, the $1B be paid.

Now it is unlikely that either side would come out 100% clean. There will be enough to prove on each side that they cannot go back and do the deal as planned. Well, probably it also makes both sides happy. In their hearts, they both knew this. But, both parties may also want maximum damage to the other to ensure a favorable position for the next move. This is no more about the price or Twitter as a company itself. This is also a matter of ego, pride, and reputation. EM is being far more consistent here! Announce deals and don’t do them. Make the environment very noisy because not everyone is as sharp as he is to grab signals from the noise etc.

Possible outcomes:

1. EM trumpets and gets away for free. Not that likely. This will be highly embarrassing for Twitter's BoD. Some of them may be forced to walk away or do so voluntarily to avoid any further damage to themselves.
2. BoD gets a good grip and fully secures the case to the extent that EM is asked to proceed with the purchase. Very unlikely. He will then probably just pay $1B to culminate season 1.
3. A probable likely scenario is that a fine of < $1B is slapped and both parties can walk away. Further, a fine on both sides may be applied for some violations and not meeting the requirements. This would make it good for both sides to leave things grey and get out and go home and sleep for some time. More so for BoD, I guess. For EM it's not that $1B cannot be paid. It is a fantastic deal to pay $1B and not buy something you think you will have a chance to buy at a lower price by multiple billions. But, paying that full price of $1B is again too much for the ego to swallow. It effectively signals that you lost the first set of the match!

Thus, a middle ground is likely. Again, paying anything less than 1B is a win for EM to get out for cheap. It would also get a moral victory for BoD to make EM pay something.

Now, there is some probability that this is the end of the saga. But, least likely. Sadly, by now no one wants to own Twitter anymore in its current form and shape. And probably that was the plan JD had in mind when stepping aside from the board. Hence making a low-intensity move by putting a loyal insider as CEO to avoid an exhaustive CEO search.

Move 6 - BoD

Apart from the court making the purchase obligatory, I think all other outcomes would require the BoD to act aggressively. Take action and show they have not gone away after having failed to sell. Having confirmed the sale price at $54.20 the sticker price and a ‘for sale’ tag remans. In essence, either they find another buyer or take the product back to the factory to fix it.

Again, what would you do if you were the BoD after settling the case?

Likely possibilities:

1. BoD makes an aggressive plan, including top management rejig. For example, changing the CEO and some changes to the BoD as well. Bringing a popular name to lead with a multi-year plan. Probably someone closer to EM? Like wars are occasionally settled off the field.
2. A PE group can smell the opportunity. Walks in with a new offer to take Twitter private. Over the next 6-12 months, there will be more 'take private' cases. No better time for Twitter. A respectable discussion with BoD provides a great opportunity to get a healthy discount on the $44B price tag.
3. Another large TechCo makes an offer and joins the game. Microsoft bought LinkedIn for $27B and SalesForce bought Slack for a similar price. Before the opening of the markets on Monday, Twitter is now at $28B.
4. Depending on how badly the legal case ends, EM comes back with another offer to recover his hundreds of millions of dollars by saving a few billion on the purchase. He sold nearly $4B of his Tesla shares soon after announcing the deal. After that, the markets tumbled. So he has already benefitted well in his game so far. He would surely prefer to continue the streak. This is the option most likely expected by most. But, it's also the sequence of these that will matter.

If you are the BoD, would you work harder to take the lead to fix Twitter and re-position it? Would you try to find another buyer and orchestrate a new deal? Would you consider if you receive a new offer from EM again?

How the price fluctuates from today could lead someone to enter the fray while the battle is still in court. But, that is unlikely for someone to move in so rapidly before the legalities end. The risk is high but there is more reward in avoiding a bloodbath in court if this is orchestrated by either of the two parties.

Also, EM tested the immediate upper limit by his board membership announcement and then released a $54.20 offer. This could be a great tactic to test the lower limit to plan for the second offer in near future.

Thus for the BoD to maintain its credibility, it would need to set in motion a temporary uphill task. Announce some ambitious goals, publicly. Try to restore investor confidence. Bring in new faces to lead the charter. Especially because their credibility is what EM has been challenging from the time he started the game.

Move 7 – Whoever can make the move first?

1. If a new CEO is brought in, he will probably come with some assurance that there shall be no change of ownership to lead the charter at least for the next couple of years and things settle down.
2. A PE or other TechCo’s offer is tempting enough to make rapid progress and get over with it.
3. EM’s offer comes in. This could come in without the PE/TechCo offer. Or more smartly, after the alternative offer is received. come in at a marginally higher price to make it difficult to reject on a price basis.

I think the BoD will have a very strong case to reject a second offer by EM because the buyer cannot be trusted. Especially if the new offer has a large gap from the previous one, it will be easier to reject. Thus the price tag of the second offer requires more science.

The BoD may not want to work with EM at all on a new deal. But, if there are no other buyers, no other credible plan, they may not be able to reject the offer despite loathing it.

At the same time, it is unlikely that BoD wants to sit back and continue in this noise and mayhem for too long. Unless a new zeal is put back in place, there will be continued deterioration of value. The most important value for tech cos is its human capital and there will be severe loss and continued drain due to the current situation. Further, most possibilities in moves 6 and 7, make the current CXOs at Twitter highly vulnerable.

What do you think will be moves 6 and 7?

The stakes are high. For those on the inside, this is a very disturbing and troubling period. It feels like a sorry state of affairs for everyone working hard at Twitter. But those on the sidelines can take some lessons and learn from the big boys playing big games.