Elon Musk said his $44 billion cash purchase for Twitter Inc (TWTR.N) was “temporarily on pause” while he waits for the social media giant to submit statistics on the percentage of fraudulent accounts.
In premarket trade, Twitter shares plunged more than 20%, although they recovered some ground after Musk, the CEO of electric carmaker Tesla Inc (TSLA.O), published a second tweet suggesting he was still committed to the acquisition.
In lunchtime trading on Friday, the shares were down 8.6% to $41.19, a significant discount to the $54.20 per share acquisition price.
Musk, the world’s richest man, agreed to purchase Twitter on April 25 without doing due diligence in order to persuade the San Francisco-based firm to accept his “best and last offer.” This might make it more difficult for him to claim that Twitter deceived him.
Investor fears about inflation and a probable economic downturn have caused technology stocks to plummet since then.
As investors worried that the slump might 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% likelihood of completion.
“Twitter transaction on hold temporarily seeking details supporting computation that spam/fake accounts constitute fewer than 5% of users,” Musk said his 92 million Twitter followers.
According to those familiar with the situation, Twitter has no immediate plans in response to Musk’s remark. The firm found the remark demeaning and in breach of the terms of their transaction contract, but was heartened when Musk later tweeted that he was committed to the acquisition, according to the sources.
Musk visited Twitter’s offices on May 6 for a meeting as part of the transaction preparation process, according to a Twitter representative.
The investors Musk recruited last week to raise $7.1 billion in fundraising had no immediate reaction.
Spam or fraudulent accounts are created with the intent of manipulating or artificially increasing activity on social media platforms like Twitter. Some people give the idea that something or someone is more popular than it actually is.
Musk mentioned the bogus account data in a media report dated 10 days ago. The statistics 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, causing some analysts to query why Musk was upping it now.
“This 5% figure has been around for a while. He would have seen it immediately… As a result, it’s possible that it’s part of a price-cutting effort “Hargreaves Lansdown analyst Susannah Streeter said.
Tesla’s shares increased by 4% on Friday morning. Since Musk declared a stake in Twitter on April 4, the stock has lost almost a quarter of its value, raising fears that he may become distracted as Tesla’s CEO and that he may have to sell additional Tesla shares to fund the acquisition.
There is plenty of precedence for a possible price renegotiation after a market slump. When the COVID-19 epidemic struck in 2020, some firms renegotiated agreed-upon acquisitions, causing a global economic crisis.
In one case, LVMH (LVMH.PA), 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 economic 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 break-up fee, and the language in the deal contract appears to limit any damages that Twitter might 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 that lose a specific performance case are usually never obligated to finish the transaction and instead negotiate a monetary settlement with their targets.
“The notion of Musk generating 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.
Musk has stated that if he purchases Twitter, he will “destroy the spam bots 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 tweets and that he opposes giving advertisers too much control on the platform.
Despite this, Musk expects advertising income to more than treble by 2028, according to media reports based on slides he provided to investors.
According to the investor presentation, ads will account for around 45 percent of Twitter’s overall income by that time, down from virtually all of its revenue now.
Musk claimed earlier this week that if he acquires Twitter, he will lift the restriction on former US President Donald Trump, showing his goal to reduce moderation.
Trump, who founded a competing site called Truth Social, used his own platform to comment on the argument.
“There is no way Elon Musk is going to acquire Twitter for such a ludicrous price,” Trump said in a post, adding that his site is far superior.
