Elon Musk cited bots when he said Twitter’s $44 billion takeover was “temporarily on hold,” but not everyone believes that explanation.
On Friday, the world’s richest man tweeted that he was suspending his bid as he awaits further information to confirm whether the social media company’s quarterly estimates of his fake accounts were accurate, sending shares tumbling Twitter and raising questions about what exactly Musk meant.
This is because agreed transactions cannot be legally put on hold. Twitter lawyers are still working with Musk’s team to close the deal, a person familiar with the situation said. The billionaire himself said he was still “committed to the acquisition.”
Some analysts interpreted Musk’s maneuver as an attempt to force Twitter back to the negotiating table to secure a cheaper deal as tech stocks cool, or to find a way out.
“Unless Twitter provides grossly flawed data – which would constitute serious security fraud – this could be a way to negotiate a lower price or walk away,” said Stefano Bonini, governance expert at company at Stevens Institute of Technology. “In any case, it shows that we are still far enough away from this transaction happening for real.”
Social media companies have long attempted to contain the fake accounts that litter their platforms, bombarding users with unsolicited commercial messages, content or requests. Beyond spam and financially motivated scams, fake accounts can increase follower counts, give the impression of fake popularity, or be deployed in misinformation campaigns.
Musk’s tweet hinted that Twitter – which has long struggled with complaints about its bots – has more fake accounts than it discloses. He pointed to a news report citing a recent company estimate that “less than 5%” of Twitter users are fake accounts and spammers.
The figure has also appeared in every quarterly earnings statement dating back to 2014, although Twitter warns it is only an estimate and “could be higher”. It has also been disputed by some researchers – a 2017 study estimated the total at between 9 and 15%.
Twitter has carried out occasional purges of spam accounts and invested in systems to catch and eradicate others. But he also rejected the researchers’ estimates and suggested the worry is exaggerated.
For Musk, who has over 92 million followers on the platform and is regularly targeted by cryptocurrency scammers, the issue has been a bugbear.
“If I had one dogecoin for every crypto scam I saw, we would have 100 billion dogecoin,” Musk said in an interview last month. He said one of his priorities for the platform would be to “defeat spambots or die trying”.
Brian Wieser, Global President of Business Intelligence at GroupM, said: “In general, we should be skeptical about the number of users, as an estimate has to be made and there is no sufficient authentication. to find out if you have to be human.”
He noted that Twitter encourages the use of aliases more than Facebook, owned by Meta, which tries to link profiles to users’ real identities. “But it seems dishonest to suddenly suggest that it’s something new,” added Wieser.
A cheaper offer?
While the bot dilemma isn’t new, one thing has changed since Musk first launched his offering: tech stocks are slipping. Since the CEO of Tesla made an offer to buy Twitter on April 14, the Nasdaq has fallen almost 18%. The social media platform’s share price is down but has outperformed the tech index, mainly thanks to Musk’s bid.
Nathan Anderson, the founder of short seller Hindenburg Research, said earlier this week that the rout in tech stocks had given Musk leverage to recut the deal to buy Twitter at a lower valuation.
“In our view, Musk holds all the cards here,” Anderson said. “The board was quick to accept the deal when the terms were much more favourable, and we believe they would again make the right decision given the current reality.”
While few know Musk’s true motives for casting doubt on the deal, several analysts believe he may be trying to secure more favorable terms.
“The $44 billion price tag is huge, and it may be a strategy to get back on how much he’s willing to pay to acquire the platform,” said Susannah Streeter, technology analyst at Hargreaves Lansdown.
Brent Thill, a technical analyst at Jefferies, agreed: “We believe Elon Musk is suspending the deal to negotiate a lower price.”
Once a deal is struck, however, it is very difficult to get a board to accept a lower offer. Delaware courts, which hear most corporate cases, have rarely allowed this to happen unless both parties agree. Twitter’s board would risk being sued if it accepted a lower price without serious justification.
Musk could use what’s called a “material adverse change” clause to force Twitter to come to the negotiating table and accept a lower offer. The bar for such a clause, however, is quite high. Many buyers have tried to use them during the pandemic to drive down the price of deals made before the Covid-19 pandemic wreaked havoc on valuations. Few succeed.
One company that did was LVMH, which asked jeweler Tiffany to lower its selling price during the pandemic. As part of its strategy, the French luxury group threatened to pull out of the deal, saying Tiffany had made changes during the pandemic that violated its contractual agreement.
Some think Musk could try something similar. “Sometimes acquirers may use new ‘problems’ as a basis for renegotiating the deal price – even if Musk has no right to do so contractually, a board may find it easier to renegotiate than to argue 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 is simply looking to walk away. It will likely be up to the courts to decide if he could do that easily.
Twitter agreed to a termination fee that could technically allow Musk to drop his $1 billion takeover. However, the social media company can also take legal action to force him to complete the deal.
Everything will depend on the circumstances. Daniel Rubin, a mergers and acquisitions lawyer at Dechert, the US business law firm, said Musk couldn’t just walk away by paying the $1 billion termination fee, but that he could find a way to force Twitter to take the money and move on.
“It can still design the terms that will leave Twitter with no meaningful choice but to terminate and allow it to walk away with a fee that caps its liability, even for willful breaches. [the terms of the deal]. It’s basically a walk to the right, with a few steps in between,” Rubin said.
Musk secured the financing for the deal but is trying to reduce his $6.5 billion margin loan by inviting wealthy and institutional investors to back his offer with equity. It recently raised $7.14 billion in funding from investors including Oracle co-founder Larry Ellison, crypto exchange Binance, and asset management groups Fidelity, Brookfield, and Sequoia Capital. However, he is still looking for more support.
It’s unclear if he has trouble doing so, and could see it as a way out of the deal, a person with knowledge of the matter said.
A longtime attorney said Musk would most likely be forced to complete the Twitter takeover under existing terms, noting that Delaware state courts had been almost universally unkind to buyers seeking to back out of signed deals.
“Elon is a wildcard in his own right, but he may also be the most unsympathetic potential defendant in commercial litigation in history, including Carl Icahn,” the attorney said.
Additional reporting by Sujeet Indap in New York