Why is Elon Musk really putting his Twitter deal ‘on hold’?

Elon Musk called bots when he declared Twitter’s $44 billion acquisition “temporarily on hold,” but not everyone believes that explanation.

The world’s richest man tweeted Friday that he was suspending his bid while he waited for further information to confirm whether the social media company’s quarterly estimates of his fake accounts were accurate, knocking Twitter shares down and raising questions about what exactly Musk meant.

Indeed, agreed transactions cannot be legally suspended. Twitter’s lawyers are still working with Musk’s team to finalize the deal, said a person familiar with the situation. The billionaire himself said he was still “committed to the takeover”.

Some analysts have interpreted Musk’s maneuver as an attempt to force Twitter back to the negotiating table to get a cheaper deal as tech stocks cool, or to find a way to back out.

“Unless Twitter has grossly misreported data — which would be a serious security fraud — this could be one way to negotiate a lower price or walk away,” said Stefano Bonini, a corporate governance expert at the Stevens Institute of Technology. . “In any case, this shows that we are still a long way from a real transaction.”

Social media companies have long tried to curb the fake accounts that litter their platforms and bombard users with unsolicited commercial messages, content or solicitations. In addition to financially motivated spam and scams, fake accounts can increase the number of followers, give the impression of false popularity or are used in disinformation campaigns.

Musk’s tweet suggested concerns that Twitter — which has long had complaints about its bots — has more fake accounts than it reveals. He highlighted a news story, citing a recent company estimate that “less than 5 percent” of Twitter users are fake and spam accounts.

The figure has also appeared in every quarterly statement of earnings dating back to 2014, though Twitter warns it’s just an estimate and “could be higher.” It’s also been disputed by some researchers — a 2017 study estimated the total to be between 9 and 15 percent.

Twitter has occasionally deleted spam accounts and invested in systems to capture and exterminate others. But it has also rejected researchers’ estimates and suggested the concern is exaggerated.

For Musk, who has more than 92 million followers on the platform and is regularly targeted by cryptocurrency scammers, the issue was a specter.

“If I had a dogecoin for every crypto scam I saw, we would have 100 billion dogecoin,” Musk said in an interview last month. He has said that one of his priorities for the platform would be to “beat the spam bots or die trying”.

Brian Wieser, global president of business intelligence at GroupM, said, “In general, we should be skeptical about the number of users because there is an estimation and insufficient authentication to determine whether you need to be human.”

He noted that Twitter encourages the use of aliases more compared to Meta-owned Facebook, which tries to match profiles with users’ real identities. “But it seems disingenuous to suddenly suggest that this is something new,” Wieser added.

A cheaper deal?

While the bot dilemma isn’t new, one thing has changed since Musk first made his bid: technology stocks are slipping. Since Tesla’s CEO made an offer to buy Twitter on April 14, the Nasdaq has fallen nearly 18 percent. The social media platform’s stock price has fallen, but has outperformed the tech index, mainly thanks to Musk’s bid.

Nathan Anderson, the founder of shortseller Hindenburg Research, said earlier this week that the tech stock price gave Musk leverage to re-close the deal to buy Twitter at a lower valuation.

“In our view, Musk holds all the cards here,” Anderson said. “The board quickly agreed to the deal when conditions were much more favourable, and we believe they would once again make the right decision when faced with the current reality.”

While few know Musk’s real motives for questioning the deal, several analysts believe it’s possible he will try to get more favorable terms.

“The $44 billion price tag is huge, and it could be a strategy to cut back on the amount he’s willing to pay to acquire the platform,” said Susannah Streeter, a tech analyst at Hargreaves Lansdown.

Brent Thill, a tech at Jefferies, agreed: “We think Elon Musk is putting the deal on hold to negotiate a lower price.”

However, once a deal is agreed it is very difficult to get a board to accept a lower offer. The Delaware courts, which rule in most business cases, have rarely allowed this unless both parties agree. Twitter’s board runs the risk of being sued if it agrees to a lower price without serious justification.

Musk could use a so-called “material adverse change” clause to force Twitter to come to the negotiating table and accept a lower offer. However, the bar for such a clause is quite high. Many buyers tried to use them during the pandemic to lower the price of deals closed before the Covid-19 pandemic devastated valuations. Few succeed.

One company that did was LVMH, which prompted jeweler Tiffany to lower its retail price during the pandemic. As part of its strategy, the French luxury group threatened to walk away from the transaction, alleging that Tiffany made changes during the pandemic that violated its contractual agreement.

Some think Musk could try something similar. “Sometimes buyers use new ‘issues’ as a basis for renegotiating the deal price — even if Musk doesn’t have the contractual right to do so, a board of directors might think it’s easier to renegotiate than litigate.” said Ann Lipton, an associate professor of business law and entrepreneurship at Tulane University.

Is Musk looking for a way out?

Another possibility is that Musk just wants to walk away. Whether he could do that easily will likely be a matter for the courts to decide.

Twitter agreed on a termination fee that could technically allow Musk to close his $1 billion acquisition. However, the social media company can also file a lawsuit to force it to complete the transaction.

Much will depend on the circumstances. Daniel Rubin, a merger and acquisition attorney at Dechert, the US law firm, said Musk couldn’t just walk away by paying the $1 billion termination fee, but he could find a way to force Twitter to take cash and to go on.

He can always create the conditions that leave Twitter no meaningful choice but to terminate and let him walk away with compensation that limits his liability, even for the willful violation [the terms of the deal]† It’s essentially a walk to the right, with a few steps in between,” Rubin said.

Musk has secured funding for the deal but is seeking to reduce its $6.5 billion margin loan by inviting wealthy and institutional investors to back its offer with equity. He recently raised $7.14 billion in funding from investors including Oracle’s co-founder Larry Ellison, crypto exchange Binance, and wealth management groups Fidelity, Brookfield and Sequoia Capital. However, he is still looking for more support.

It is unclear whether he has any problem with that and perhaps sees this as a way out of the deal, according to an expert.

A long-term deal attorney said Musk would most likely be forced to complete the Twitter buyout under existing terms, noting that Delaware’s courts had been almost universally unfriendly to buyers who wanted to walk away from signed deals.

“Elon is a wildcard to himself, but he is also perhaps the most unsympathetic potential defendant in any commercial lawsuit in history, including Carl Icahn,” the attorney said.

Additional reporting by Sujeet Indap in New York

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