Elon Musk says his deal to buy Twitter is on hold

“Twitter deal temporarily on hold pending details to support calculation that spam/fake accounts indeed represent less than 5% of users,” Musk tweeted on Friday.

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”.

In its quarterly financial report, released on April 28, Twitter estimated that fake or spam accounts accounted for less than 5% of the platform’s active users in the first three months of the year. Twitter noted that the estimates were based on a review of sample accounts and that the numbers were “reasonable.”

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.

A circus’

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.

Ignore convention

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.

Musk said he would buy Twitter for $54.20 a share. But Twitter’s shares never came close to that price, hovering below $50 for weeks. That was a sign that investors were skeptical that Musk would eventually live up to his offer.

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.

Part of the problem was Twitter’s connection to Teslas TSLA lot. Tesla CEO Musk had planned to borrow some of his Tesla stake to fund the deal, but Tesla’s shares, along with most other stocks, have fallen rapidly this year.

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.

Ives said the news of the Twitter deal was good for Tesla TSLA stocks, which rose 6% in premarket trading Friday. Shares of Tesla, the world’s most valuable automaker, have lost about a third of their value since Musk revealed he had taken a stake in Twitter.
In addition to selling $8.5 billion of his Tesla stock last month, or about 6% of his holdings, Musk used his Tesla shares as part of the collateral he needed to raise money for the Twitter purchase. . But the depreciation of Tesla stock raised doubts as to whether he could go through with financing the Twitter deal.
The Wall Street Journal also reported that the SEC and the Federal Trade Commission both looked into Musk’s purchases from Twitter earlier this year and whether he properly disclosed them.

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.

On Tuesday, Musk made headlines by saying he would allow former President Donald Trump to return to Twitter once the takeover was complete. Trump’s account was permanently deleted following his followers’ attack on the US Capitol on January 6, 2021.
Earlier this week, Twitter confirmed it is pausing most hires and replenishments except for “critical” roles, and cutting other non-labour costs. It also confirmed that two top executives, consumer general manager Kayvon Beykpour, and sales product leader Bruce Falck, would be leaving the company.

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.

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