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

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

Elon Musk quoted bots as declaring Twitter’s $44 billion acquisition “temporarily on hold,” but not everyone believes that explanation.

The world’s richest man tweeted on Friday that he was pausing his bid while awaiting more information to confirm if the social media company’s quarterly estimates of its fake accounts were accurate, sending Twitter shares plummeting and raised questions about what exactly Musk meant.

In fact, agreed transactions cannot be legally put on hold. Twitter’s attorneys are still working with Musk’s team to finalize the deal, a person familiar with the situation said. The billionaire himself said he remains “committed to the takeover.”

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

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

Social media companies have long tried to curb the fake accounts that pollute their platforms and bombard users with unsolicited commercial messages, content, or requests. Aside from financially motivated spam and scams, fake accounts can increase followers, give the impression of false popularity, or be used in disinformation campaigns.

Musk’s tweet hinted at concerns that Twitter — which has long grappled with complaints about its bots — has more fake accounts than it lets on. He highlighted a news story in which he cited a recent company estimate that “less than 5 percent” of Twitter users are fake and spam accounts.

The number has also appeared in every quarterly earnings report since 2014, although Twitter warns it’s just an estimate and “could be higher.” It’s also been disputed by some researchers — a 2017 study put the total at between 9 and 15 percent.

Twitter has occasionally deleted spam accounts and invested in systems to catch and wipe out others. But it has also dismissed the researchers’ estimates and recommended the concern is overdone.

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

“If I had a dogecoin for every crypto scam I see, we would have 100 billion dogecoins,” 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, GroupM’s Global President of Business Intelligence, said, “In general, we should be skeptical about user counts because estimates have to be made and there isn’t sufficient authentication of whether it has to be human.”

He noted that Twitter tends to encourage the use of aliases compared to meta-owned Facebook, which attempts to link profiles to users’ real-world identities. “But it seems disingenuous to suddenly suggest that this is a new thing,” Wieser added.

A cheaper offer?

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

Nathan Anderson, the founder of short seller Hindenburg Research, said earlier this week that the tech-stock routine gave Musk an opportunity to cut the deal again to buy Twitter at a lower valuation.

“From our point of view, Musk has all the cards in his hands here,” Anderson said. “The board was quick to approve the deal when terms were significantly more favorable and we believe they would make the right decision again given the current reality.”

While few know Musk’s true motives for calling the deal into question, 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 backtrack on the amount he’s willing to pay to acquire the platform,” said Susannah Streeter, tech analyst at Hargreaves Lansdown.

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

However, once a deal is closed, it is very difficult to get a board to accept a lower offer. The Delaware courts, which rule most corporate cases, have rarely allowed this unless both parties have consented. The Twitter board would risk a lawsuit if they agreed 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 the deals agreed before the Covid-19 pandemic wreaked havoc on reviews. Few succeed.

One company that did this was LVMH, which led 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, claiming Tiffany made changes that violated its contractual agreement during the pandemic.

Some think Musk might try something similar. “Sometimes buyers use new ‘issues’ as a basis for renegotiating the transaction price — even if Musk doesn’t have the contractual right to do so, a board might think renegotiating is easier than arguing about it,” said Ann Lipton, 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. The courts will have to decide whether he was able to do this without further ado.

Twitter agreed to a termination fee that could technically allow Musk to abandon his acquisition for $1 billion. However, the social media company can also sue him to force him to complete the transaction.

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

“He can at any time create conditions that leave Twitter with no reasonable choice but to terminate and allow him to get away with a fee that limits his liability even for willful breach.” [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 trying to reduce his $6.5 billion margin loan by inviting wealthy and institutional investors to back his bid with equity. He recently raised $7.14 billion in funding from investors including Oracle co-founder Larry Ellison, crypto exchange Binance, and wealth management groups Fidelity, Brookfield, and Sequoia Capital. However, he is still looking for further support.

It’s unclear if he’s bothering with it and possibly seeing it as a way out of the deal, said a person familiar with the matter.

A longtime Deals attorney said Musk will most likely be forced to complete the Twitter buyout on existing terms, noting that Delaware state courts have almost universally been unkind to buyers who wish to back out of signed agreements.

“Elon is a wild card in his own right, but he may also be the most uniquely unsympathetic potential defendant in a commercial trial in history, including Carl Icahn,” the attorney said.

Additional reporting by Sujeet Indap in New York

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