The news initially sent Twitter stocks down more than 20% in pre-market trading before the stock recovered somewhat. Two hours after his first tweet, Musk posted that he is “still committed to acquisition”.
But it acknowledged that the readings had not been independently verified and that the actual number of fake or spam accounts could be higher.
Twitter has had a spam problem for years, and the company has previously recognized that reducing fake and malicious accounts would be a major factor in its ability to continue growing. It’s unclear why Musk would pull out of the deal over the latest disclosure.
Musk turned “this Twitter circus show into a Friday the 13th horror show,” Wedbush Securities tech analyst Dan Ives wrote in a note to clients early Friday.
Musk would owe Twitter a $1 billion termination fee if he canceled the deal.
“The Street will view this deal as 1) likely to fall apart, 2) Musk negotiates a lower deal price, or 3) Musk simply walks away from the deal with a $1 billion cancellation fee,” Ives wrote. “Many will see this as Musk using these Twitter archiving/spam accounts as a way to get out of this deal in a rapidly changing market.”
Shares — especially technology — have fallen sharply since Musk and Twitter reached a deal nearly three weeks ago to buy the company.
The way Musk announced the break from the deal — in a tweet — was also unusual, at least by normal corporate M&A standards.
Business transferees typically perform due diligence, an assessment of the company’s finances and proprietary information, before closing a deal. During that process, they may come across information prompting them to reconsider the deal or its valuation, but typically such disclosure would be disclosed in a filing with the Securities and Exchange Commission.
“Usually we would see some sort of filing that would come first, an amendment to previous filings on the deal that says ‘we discovered some information during the due diligence process and we are reconsidering our acquisition,'” said Josh White, a assistant professor of finance at Vanderbilt University and a former financial economist for the SEC.
“This happens when you get access to the books and access proprietary information. What normally doesn’t happen is a tweet,” White said.
The unusual move may not be significant enough to warrant SEC action, White said, but it could grab the attention of Twitter’s attorneys. As part of the deal, Musk agreed to consult with Twitter before making any public statements about the deal, and to avoid making tweets that “discredit the company,” according to filings with the SEC. Still, Twitter’s board will likely prefer the deal go through due to its strong valuation compared to the company’s current share price.
But if the deal falls apart, “I would expect Twitter’s current shareholders to potentially file a lawsuit” because Musk’s actions had damaged them by lowering the stock price, White added.
Twitter has not returned a request for comment on Musk’s Friday tweets.
Skepticism from the start
Even as Musk has worked to secure financing for the acquisition, there has been skepticism about whether the deal would go through since Twitter’s board agreed to the offer on April 26.
Wall Street analysts were also unconvinced of Musk’s ability to buy Twitter, at least not for $54.20 a share. The consensus target was below $52 and the vast majority gave a “hold” rating to the company’s stock.
Musk’s sale of a significant number of Tesla stock to fund his Twitter deal had also put pressure on the automaker’s stock. Since he had already secured much of his Tesla stock elsewhere, he didn’t have much support left if he had to raise more money to complete the Twitter takeover.
Musk’s plans for Twitter
Musk had given few details about his plans for the social media company, although he often spoke out about bot accounts promoting spam content. He also says the company was too quick to remove accounts that violate content moderation rules.
Twitter CEO Parag Agrawal sent out a series of tweets Friday afternoon acknowledging the leadership shake-up at the company the previous day.
“Some have wondered why a ‘lame-duck’ CEO would make these changes if we were acquired after all,” Agrawal said. “While I expect the deal to be closed, we must be prepared for all scenarios and always do what is right for Twitter. I am responsible for leading and managing Twitter, and our job is to build a stronger Twitter every day .”
— Clare Duffy and Allison Morrow of CNN Business contributed to this article.