Elon Musk said on Friday that his $44 billion cash purchase for Twitter Inc is “temporarily on pause” while he waits for evidence on the amount of fraudulent accounts on the social media platform. In premarket trade, Twitter shares plunged more than 20%, although they recovered some ground after Musk, the CEO of electric car maker Tesla Inc, published a second tweet suggesting he was still committed to the acquisition. The shares were down 10% to $40.50 in morning trading on Friday, a steep discount to the $54.20 per share acquisition price. Musk, the world’s richest person, 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 final offer.” This could make it harder for him to argue that Twitter somehow misled him.
In one instance, French retailer LVMH threatened to walk away from a deal with Tiffany & Co. The U.S. jewelry retailer agreed to lower the price by $425 million to $15.8 billion. Acquirers seeking a get out sometimes turn to “material adverse effect” clauses in their merger agreement, arguing the target company has been significantly damaged. But the language in the Twitter deal agreement, as in many recent mergers, does not allow Musk to walk away because of a deteriorating business environment, such as a drop in demand for advertising or because Twitter’s shares have plunged. Musk is contractually obligated to pay Twitter a $1 billion break-up fee if he does not complete the deal, and the language in the deal contract appears to cap any damages that Twitter can seek from Musk to that level. But the contract also contains a “specific performance” clause that a judge can cite to force Musk to complete the deal. In practice, acquirers who lose a specific performance case are almost never forced to complete an acquisition and typically negotiate a monetary settlement with their targets.
Musk tweeted a Reuters story from ten days ago that cited the fake account figures. Twitter has said that the figures were an estimate and that the actual number may be higher. The estimated number of spam accounts on the microblogging site has held steady below 5% since 2013, according to regulatory filings from Twitter, prompting some analysts to question why Musk was raising it now. “This 5% metric has been out for some time. He clearly would have already seen it… So it may well be more part of the strategy to lower the price,” said Susannah Streeter, an analyst at Hargreaves Lansdown. Representatives for Musk did not immediately respond to requests for comment from Reuters. Tesla’s stock rose 4% on Friday morning. The shares have lost about a quarter of their value since Musk disclosed a stake in Twitter of April 4, amid concerns he will get distracted as Tesla’s chief executive and that he may have to sell more Tesla shares to fund the deal. There is plenty of precedent for a potential renegotiation of the price following a market downturn. Several companies repriced agreed acquisitions when the COVID-19 pandemic broke out in 2020 and delivered a global economic shock.
“The nature of Musk creating so much uncertainty in a tweet (and not a filing) is very troubling to us and the Street and now sends this whole deal into a circus show with many questions and no concrete answers as to the path of this deal going forward,” Wedbush analyst Daniel Ives wrote in a note. DEFEAT THE BOTS Musk has said that if he buys Twitter he “will defeat the spam bots or die trying” and has blamed the company’s reliance on advertising for why it has let spam bots proliferate. He has also been critical of Twitter’s moderation policy and has said he wants Twitter’s algorithm to prioritize tweets to be public and was against too much power on the service to corporations that advertise.Nevertheless, Musk is targeting advertising revenue to more than double by 2028, according to slides he presented to investors . Ads are expected to make up about 45% of Twitter’s total revenue by that time, down from nearly all of its revenue today, according to the investor presentation. Earlier this week, Musk said he would reverse Twitter’s ban on former U.S. President Donald Trump when he buys the social media platform, signaling his intention to cut moderation.a
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