Elon Musk tweeted that his $44 billion deal for Twitter Inc TWTR-N was “temporarily on hold” Friday while he awaits data on the percentage of its fake accounts, sending shares in the social media platform tumbling.
Tesla CEO Musk, who added that he remains committed to the acquisition, decided to waive due diligence when he agreed to buy Twitter on April 25, in an effort to get the San Francisco-based company to accept his “best and last offer.”
Since then, technology shares have fallen amid investor concerns about inflation and a possible economic slowdown.
The spread between the bid price and the value of Twitter’s stock has widened in recent days, indicating a less than 50 percent chance of completion, as investors predicted that the economic downturn would prompt Musk to walk or seek a lower price.
“The Twitter deal is temporarily on hold pending account backing up details that spam/fake accounts already account for less than 5 percent of users,” Musk told his more than 92 million Twitter followers.
Twitter did not immediately respond to a request for comment. There was no immediate reaction from the investors that Musk picked last week to raise $7.1 billion in funding.
Musk tweeted a Reuters story ten days ago that cited the fake account numbers. Twitter said the numbers were estimates and that the actual number could be higher.
The estimated number of spam accounts on the microblogging site has held steady at less than 5 percent since 2013, according to regulatory filings from Twitter, leading some analysts to question why Musk is raising them now.
“That metric has been off at 5 per cent for some time now. Clearly he had seen it already,” said Susanna Streeter, an analyst at Hargreaves Lansdowne. “So a price cut might be a bigger part of the strategy.”
Twitter shares were down 16 percent at $38.06 in premarket trading in New York, well below the transaction price of $54.20 per share. Shares of Tesla Inc TSLA-Q rose about 5 percent.
Tesla shares have lost about a quarter of their value since Musk revealed a stake in Twitter on April 4, amid fears that he will be distracted as Tesla’s CEO and that he may have to sell more Tesla shares to fund the deal.
There is plenty of precedent for a possible price renegotiation in the wake of the market downturn. Several companies re-priced agreed acquisitions when the COVID-19 pandemic broke out in 2020 and triggered a global economic shock.
In one case, French retailer LVMH threatened to walk away from a deal with Tiffany & Co. The US jewelry retailer agreed to cut the price by $425 million to $15.8 billion.
Exit-seeking acquirers sometimes resort to the “material adverse effect” clauses in the merger agreement, arguing that the target company has been significantly hurt.
But the language in the Twitter deal agreement, as in many recent mergers, doesn’t allow Musk to get carried away by a deteriorating business environment, such as lower advertising demand or a drop in Twitter stock.
Musk is contractually obligated to pay Twitter a $1 billion breakup fee if it does not complete the deal, and the language in the deal contract appears to limit any damages Twitter could demand of Musk to that level.
But the contract also contains a “specific performance” clause that a judge can invoke to compel Musk to complete the deal.
In practice, acquirers who lose a certain performance status are not forced to complete the acquisition and usually negotiate a cash settlement with their targets.
Musk said that if he bought Twitter, he would “beat the spam bots or die trying” and blamed the company’s reliance on ads for why it allowed spam bots to proliferate.
He also criticized Twitter’s moderation policy and said he wanted the Twitter algorithm to prioritize tweets to be public and was against excessive force on service for companies that advertise.
Still, Musk is targeting ad revenue to more than double by 2028, according to slides he presented to investors and reported by The New York Times.
Ads are expected to make up about 45 percent of Twitter’s total revenue by then, down from nearly all of its revenue today, according to the investor presentation.
Earlier this week, Musk said he would rescind Twitter’s ban on former US President Donald Trump when he buys the social media platform, signaling his intent to cut back on moderation.
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