Elon Musk said on Friday that his $44 billion cash purchase for Twitter Inc is “temporarily on hold” while he waits for evidence on the number of false accounts on the social media platform.
In premarket trade, Twitter shares dropped more than 20% but recovered after Tesla CEO Elon Musk made a second tweet claiming he was still committed to the deal. The stock fell 12% in strong volume before the market opened, as investors worried about the takeover.
Musk, the world’s richest man, agreed to buy Twitter on April 25 without conducting due diligence in order to persuade the San Francisco-based firm to accept his “best and last offer” of $54.20 per share.
Investor concerns about inflation and a potential economic downturn have caused technology stocks to plummet since then.
As investors worried that the slump would drive Musk to walk or seek a lower price, the difference between the offer price and the value of Twitter shares had increased in recent days, signifying less than a 50% chance of completion.
“Twitter deal on hold temporarily seeking details supporting calculation that spam/fake accounts constitute fewer than 5% of users,” Musk told his 92 million Twitter followers.
Spam or fraudulent accounts are created with the intent of manipulating or artificially increasing activity on social media platforms like Twitter. Some are meant to boost sales, while others are meant to give the idea that something or someone is more popular.
A request for comment from Twitter was not immediately returned. The investors’ Musk recruited last week to raise $7.1 billion in fundraising had no immediate reaction.
Musk mentioned the bogus account data in a reporter’s piece 10 days earlier. The figures were an estimate, according to Twitter, and the true number might be higher.
According to regulatory filings from Twitter, the estimated number of spam accounts on the microblogging site has remained below 5% since 2013, prompting some analysts to query why Musk was upping it now.
“This 5% figure has been around for a while. He would have noticed it immediately… As a result, it’s possible that it’s part of a price-cutting effort “Hargreaves Lansdowne analyst Susannah Streeter said.
Musk’s representatives did not immediately respond to reporters’ requests for comment.
Meanwhile, Tesla’s stock jumped 7% in premarket trade. Since Musk declared a stake in Twitter on April 4, the stock has lost almost a quarter of its value, raising concerns that he may become distracted as Tesla’s CEO and that he may have to sell more Tesla shares to fund the acquisition.
There is plenty of precedent for a possible price renegotiation after a market downturn. When the COVID-19 epidemic struck in 2020, several firms renegotiated agreed-upon acquisitions, causing a global economic crisis.
In one case, LVMH, a French retailer, threatened to pull out of an agreement with Tiffany & Co. The price of the jewelry retailer in the United States has been reduced by $425 million to $15.8 billion.
Acquirers looking for a way out frequently invoke “substantial adverse effect” clauses in their merger agreements, claiming the target firm has been severely harmed.
However, unlike many previous mergers, the Twitter acquisition agreement does not allow Musk to back out due to a deteriorating business climate, such as a decline in advertising demand or a drop in Twitter’s stock price.
If Musk does not complete the purchase, he is contractually compelled to pay Twitter a $1 billion breakup fee, and the language in the deal contract appears to limit any damages that Twitter can seek from Musk to that amount.
However, the contract includes a “particular performance” language that a judge may utilize to compel Musk to finish the transaction.
In fact, acquirers who lose a specific performance case are almost never obligated to finish the transaction and instead negotiate a monetary settlement with their targets.
“The notion of Musk creating so much ambiguity in a tweet (rather than a file) is quite disturbing to us and the Street,” Wedbush analyst Daniel Ives wrote in a note.
DESTROY THE BOTS
Musk has stated that if he purchases Twitter, he will “destroy the spambots or die trying,” blaming the company’s reliance on advertising for allowing spam bots to flourish.
He has also been critical of Twitter’s moderation policy, stating that he wants Twitter’s algorithm to emphasize public messages and that the service should not have too much authority on the service to companies that advertise.
Nonetheless, according to slides provided to investors and reported by the New York Times, Musk expects advertising revenue to more than treble by 2028.
According to the investor presentation, ads will account for around 45 percent of Twitter’s total revenue by that time, down from nearly all of its revenue today.
Musk claimed earlier this week that if he acquires Twitter, he will lift the restriction on former US President Donald Trump, showing his intention to reduce moderation.
