Elon Musk announced that he is suspending his attempt to acquire Twitter (TWTR), weeks after agreeing to take the firm private in a $43 billion deal.
Musk tweeted on Friday, “Twitter deal temporarily on hold for details supporting calculation that spam/fake accounts constitute fewer than 5% of subscribers.”
In pre-market trade, Twitter shares first fell more than 20 percent in response to the news before recovering considerably. Musk tweeted two hours after his initial tweet that he is “still committed to acquisition.”
Musk included a link to a May 2 Reuters article regarding Twitter’s most recent disclosure of its spam and fake account problem in his tweet announcing the deal’s suspension. Twitter projected in its April 28 quarterly financial report that less than 5 percent of the platform’s active users during the first three months of the year were fraudulent or spam accounts. Twitter stated that the figures were based on a survey of sample accounts and that the company deemed the statistics to be “fair.”
It admitted, however, that the measures were not independently validated and that the actual number of fraudulent or spam accounts may be larger. Twitter has had a spam problem for years, and the business has already admitted that lowering the number of bogus and malicious accounts will be crucial to its continued growth. It is unclear why Musk would withdraw from the transaction in light of the current announcement.
A ‘circus’
Musk converted “this Twitter circus performance into a Friday the 13th horror show,” writes Wedbush Securities tech analyst Dan Ives in a Friday morning letter to investors. Musk would owe Twitter a $1 billion cancellation fee if he terminated the agreement.
Ives wrote: “The Street will perceive this transaction as 1) likely going apart, 2) Musk negotiating for a lower deal price, or 3) Musk simply walking away with a $1 billion breakup fee.” “Many will perceive this as Musk utilising this Twitter filing/spam accounts to get out of this contract in a market that is rapidly shifting,”
Since Musk and Twitter struck an agreement on the purchase of the firm over three weeks ago, stocks, particularly tech stocks, have fallen substantially.
Contravening convention
The manner in which Musk announced the deal’s suspension — via a tweet — was also unique, at least in the context of typical corporate acquisitions. Before a transaction is finalised, acquirers often do due diligence, an examination of the target company’s finances and confidential information. During this process, they may come across information that causes them to reconsider the deal or its valuation; however, such a revelation would normally be revealed in an SEC filing.
Josh White, an assistant professor of finance at Vanderbilt University and a former financial economist for the SEC, said, “Usually we’d see some sort of filing that would come first, an amendment to previous filings on the deal, that says, ‘we’ve uncovered some information during due diligence and we’re reconsidering our acquisition.'”
“This occurs when you gain access to the books and confidential information. What typically does not occur is a tweet “White stated.
White stated that the odd conduct may not be large enough to warrant SEC action, but it could attract the attention of Twitter’s attorneys. According to SEC filings, Musk committed to speak with Twitter before making any public announcements regarding the purchase and to refrain from posting any tweets that “disparage the firm.” Despite this, Twitter’s board will likely favour the offer because to its favourable valuation relative to the company’s current stock price. But if the acquisition falls through, “I would anticipate Twitter’s current shareholders to potentially file a lawsuit” claiming that Musk’s activities harmed them by causing the stock price to plummet, White added.
Twitter did not respond to a request for comment regarding Musk’s comments on Friday.
Suspicion from the outset
Even as Musk attempted to arrange finance for the acquisition, scepticism about the deal’s viability has been rife since Twitter’s board accepted the bid on April 26. Musk stated that he will acquire Twitter at $54.20 per share. However, Twitter’s shares never neared that figure, spending weeks below $50. This demonstrated investors’ scepticism that Musk would ultimately honour his pledge.
Even Wall Street experts were sceptical of Musk’s ability to acquire Twitter at $54.20 per share. The vast majority of analysts have a “hold” rating on the company’s shares, with the average price objective below $52.
Twitter’s connection to Tesla’s (TSLA) demise has contributed to the problem. Musk, the CEO of Tesla, intended to borrow against a portion of his Tesla ownership in order to finance the transaction, but Tesla’s stock, along with most other equities this year, has been rapidly declining.
Musk’s sale of a substantial number of Tesla shares to help finance his Twitter transaction had also exerted pressure on the stock price of the automaker. Having having committed a substantial portion of his Tesla shares elsewhere, he was left with little cushion should he require additional funds to complete the Twitter acquisition.
Ives stated that the Twitter deal news was positive for Tesla (TSLA) shares, which surged 6% in premarket trade on Friday. Shares of Tesla, the most valuable automobile in the world, have lost around one-third of their value since Musk stated he had acquired a stake in Twitter.
In addition to selling $8.5 billion worth of Tesla shares, or around 6 percent of his ownership, last month, Musk used Tesla shares as collateral to secure funds for the Twitter acquisition. However, the decline in the value of Tesla shares has cast doubt on his ability to finance the Twitter transaction. The Wall Street Journal also reported that the SEC and the Federal Trade Commission were investigating whether Musk disclosed his purchases of Twitter earlier this year.
Musk’s objectives for Twitter
Musk had provided few specifics about his plans for the social media startup, but he has frequently spoken out against spam-promoting bot accounts. Additionally, he asserts that the firm has been too quick to delete accounts that violate its content-moderation policies. Musk made waves on Tuesday when he stated that former President Donald Trump would be permitted to return to Twitter once the takeover is complete. After his supporters attacked the US Capitol on January 6, 2021, Trump’s account was banned permanently.
This week, Twitter revealed that it is suspending most hiring and backfills, with the exception of “business-critical” positions, and reducing other non-labor costs. Also confirmed were the departures of two top executives, consumer general manager Kayvon Beykpour and revenue product lead Bruce Falck.
Friday afternoon, Twitter CEO Parag Agrawal published a series of tweets noting the company’s leadership shakeup the previous day. “Some have questioned why a ‘lame duck’ CEO would make these adjustments if we’re being acquired anyhow,” Agrawal added. “While I expect the deal to close, we must be prepared for all possible outcomes and always act in Twitter’s best interests. I am responsible for leading and operating Twitter, and our daily mission is to make Twitter stronger.”
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