Friday, May 27 2022

May 13 (Reuters) – Elon Musk tweeted on Friday that his $44 billion cash deal for Twitter Inc (TWTR.N) was “temporarily on hold” pending the social media company providing data on the proportion of his fake accounts.

Shares of Twitter initially fell more than 20% in premarket trading, but after Musk, the managing director of electric car market Tesla Inc (TSLA.O), sent a second tweet saying he remained committed upon agreement, they regained ground.

The shares were down 8.6% at $41.19 at noon Friday, a steep discount to the acquisition price of $54.20 per share.

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Musk, the world’s richest person, decided to forego any due diligence when he agreed to buy Twitter on April 25, in a bid to get the San Francisco-based company to accept its “best and latest offer”. That might make it harder for him to claim that Twitter somehow misled him.

Since then, tech stocks have plunged amid investor worries about inflation and a potential economic slowdown.

The gap between the bid price and the value of Twitter shares had widened in recent days, implying less than a 50% chance of completion, as investors speculated the slowdown would prompt Musk to walk or seek a lower price. Read more

“The Twitter agreement is temporarily suspended pending details supporting the calculation that spam/fake accounts indeed represent less than 5% of users,” Musk told his more than 92 million Twitter followers.

Twitter is not planning any immediate action following Musk’s comment, people familiar with the matter said. The company considered the comment derogatory and a breach of their contract terms, but was encouraged by Musk who later tweeted that he was committing to the acquisition, the sources added.

Musk came to the Twitter office for a meeting on May 6 as part of the planning process for the transaction, a Twitter spokesperson said.

There was no immediate reaction from the investors Musk tapped last week to raise $7.1 billion in funding.

Spam or fake accounts are designed to artificially manipulate or stimulate activity on services like Twitter. Some make something or someone seem more popular.

Musk tweeted a Reuters story from ten days ago that cited the account’s fake numbers. Twitter said the numbers were an estimate and the actual number could be higher.

The estimated number of spam accounts on the microblogging site has remained stable below 5% since 2013, according to Twitter’s regulatory filings, prompting some analysts to question why Musk was raising it now.

“That 5% measure has been out for a while. Clearly he would have seen it before…So it may well be more part of the price-lowering strategy,” said Hargreaves Lansdown analyst Susannah Streeter.

Representatives for Musk did not immediately respond to requests for comment from Reuters.

Tesla stock rose 4% on Friday morning. Shares have lost about a quarter of their value since Musk disclosed a stake in Twitter on April 4 amid fears he could be distracted as Tesla chief executive and may have to sell more shares Tesla to fund the deal.

There are many precedents for a possible renegotiation of the price following a market downturn. Several companies revised the prices of agreed acquisitions when the COVID-19 pandemic broke out in 2020 and caused a global economic shock.

In one case, French retailer LVMH (LVMH.PA) threatened to back out of a deal with Tiffany & Co. The US jewelry retailer agreed to drop the price from $425 million to $15.8 billion.

Acquirers looking to get out sometimes turn to “significant adverse effects” clauses in their merger agreement, arguing that the target company has been significantly damaged.

But the language of the Twitter deal, 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 shares of Twitter took a dive.

Musk is contractually obligated to pay Twitter a $1 billion severance fee if it doesn’t close the deal, and the wording of the contract appears to limit any damages Twitter can seek from Musk on this level.

But the contract also contains a “specific performance” clause that a judge can cite to force Musk into the deal.

In practice, acquirers who lose a specific performance event are almost never obligated to make an acquisition and usually negotiate a monetary settlement with their targets.

“The nature of Musk creating so much uncertainty in a tweet (and not a file) is very disturbing to us and the street and now sends this whole thing into a circus spectacle with many questions and no concrete answers as to the path of this matter in the future,” Wedbush analyst Daniel Ives wrote in a note.

BEAT THE BOTS

Musk said if he bought Twitter he would “defeat spambots or die trying” and blamed the company’s addiction to advertising for why it allowed spambots to proliferate.

He also criticized Twitter’s moderation policy and said he wanted Twitter’s algorithm to prioritize tweets to be public and that he was against too much power over the service to companies that make advertising.

Still, Musk is aiming to more than double ad revenue by 2028, according to slides he presented to investors that were reported by The New York Times.

Ads are expected to make up about 45% of Twitter’s total revenue at that time, down from nearly all of its revenue today, according to the investor presentation.

Earlier this week, Musk said he would reverse the ban on Twitter imposed on former US President Donald Trump when he buys the social media platform, signaling his intention to reduce moderation.

Trump, who launched a rival site called Truth Social, used his own platform to weigh in on the fracas.

“There is no way Elon Musk is buying Twitter at such a ridiculous price, especially since it is a business largely based on bots or spam accounts,” Trump wrote in a message, adding that his site is much better.

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Reporting by Nivedita Balu in Bengaluru and Ken Li in New York Additional reporting by Greg Roumeliotis in New York Writing by Anna Driver and editing by Alexander Smith and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.

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