On July 8, 2022, businessman Elon Musk announced that he was ending his plan to buy the social network Twitter, at a price of 54.20 dollars per share, which valued the company at around 44 billion dollars (43 Billions of Euro’s). On May 13, the billionaire had already announced that he was suspending the takeover because of his concern about the real number of fake accounts on the social network, causing the group’s share price to plunge by around 20%.
“Twitter failed to comply with multiple terms of the agreement and appears to have given false and misleading information on which Elon Musk relied to enter into the acquisition agreement,” explain the lawyers of the company. entrepreneur at the SEC (Security and Exchange Commission), the policeman of the American stock market.
The disagreement is mainly based on the estimate of the number of Twitter users, the famous followers, the fake accounts are estimated according to the stakeholders at more or less than 5%.
The legal debates therefore concern the valuation of Twitter users, ie what finance calls intangible assets, and the publication of financial information about them. While brands, patents, the number of customers or technologies, know-how and manufacturing processes have no physical substance, these intangible assets nevertheless contribute significantly to the creation of value for the companies that control them. Yet, unlike tangible assets, companies are generally not required to disclose information about their intangible assets…unless during an acquisition.
Useful financial information
Intangible assets can indeed play a major role when one company takes over another. The acquirer may, for example, carry out the operation for the sole purpose of controlling a brand or technology owned by another company. During these operations, the acquirer is therefore obliged to recognize and communicate all the intangible assets of the acquired company. However, this publication obligation is currently applied with variable rigor from one company to another, leading to information that differs greatly depending on the operations.
However, as we show in a recent research article, the publication of information on intangible assets constitutes a particularly useful tool for financial analysts. We studied the content of published information on intangible assets following nearly 500 business combinations carried out between 2002 and 2011 in the United States.
Overall, our results indicate that the disclosures and amounts relating to recently acquired intangible assets provide relevant information to financial analysts.
The acquisition of Skype by eBay in 2005, for example, is particularly illustrative. If eBay shareholders had known that Skype did not hold many patents related to programs exploited in its activity, that would have been reason enough to have a negative impact on the interest of the operation. The information has not been shared because this type of publication is not, in the current context, mandatory. In addition, this acquisition ended with the recognition of a goodwill (an overvaluation) of $2,300 million out of a total acquisition price of $2,600 million.
A source of disagreement
Similarly, after its acquisition of WhatsApp, Facebook had to complete the allocation of the acquisition price, that is to say, allocate the acquisition price granted to the acquired assets, in particular intangibles. At the time of the acquisition, the price paid included 4 billion in cash, 12 billion in shares and 3 billion in blocked shares (restricted stocks) for WhatsApp employees. As the value of Facebook stock has climbed since the announcement of the deal, the purchase price ultimately amounted to nearly $22 billion in 2014. Intangibles clearly accounted for much of the agreed price for WhatsApp.
In another study, we also showed that a low level of transparency favored both disagreements between analysts, reflecting the uncertainty of information, and disagreements between analysts and managers, indicating an asymmetry of information. . We see with the case of Elon Musk and Twitter that these disagreements can concern other parties and lead to legal action.
This problem is central for all companies seeking to justify an acquisition to their shareholders or to avoid unpleasant surprises. If the value of a company largely depends on these intangible assets, then shouldn’t we require more information about them?
ByProfessor, Accounting Department, IÉSEG School of Management.
The original version of this article was published on The Conversation.