This has forced investors to hit the sell button in the last couple of weeks. Twitter shares have erased all of their gains since Musk announced a 9.2 percent stake in the company that quickly evolved into a $44 billion takeover bid. Shares are trading at around $40, down 22 percent from their peak.
The San Francisco-based social media platform has experienced substantial volatility over Musk’s tweets that have placed widespread doubts on his acquisition efforts.
What is putting the deal “temporarily on hold,” according to Musk, is consternation regarding the legitimate number of fake and spam accounts.
The Washington Post reported on June 8 that Twitter’s board of directors will comply with Musk’s demands for internal numbers, giving him access to its full “firehose.” This will include 500 million tweets posted each day, according to the Washington Post, citing an anonymous source close to the matter.
Twitter has asserted that bots represent fewer than 5 percent of its 219 million users, although independent researchers claim the figure might be three times higher.
Musk’s legal team penned a letter to Twitter executives last week, requesting testing methods to help garner the necessary financing for the purchase and initiate the transition to his ownership.
“This is a clear material breach of Twitter’s obligations under the merger agreement and Mr. Musk reserves all rights resulting therefrom, including his right not to consummate the transaction and his right to terminate the merger agreement,” the letter stated. “At this point, Mr. Musk believes Twitter is transparently refusing to comply with its obligations under the merger agreement, which is causing further suspicion that the company is withholding the requested data due to concern for what Mr. Musk’s own analysis of that data will uncover.”
Without this pertinent information, Musk is accusing the company of violating the terms of his $54.20-a-share offer. This could prompt Musk to walk away from the agreement.
Analysts, however, say the company has repeatedly included a statement about the risk of miscalculating the number of spam users in its annual and quarterly SEC filings.
While some on Wall Street believe Musk is using spam bots as a tactic to negotiate a better deal, business leaders believe management should be held accountable if it is proven that they’ve exaggerated actual user numbers.
Brett Kingstone, a tech entrepreneur and Florida businessman, believes that Musk has crafted a “brilliant deal” rather than rushing into a terrible acquisition “to try to save the world.”
“This deal is more critical for Twitter’s survival than it is for Musk’s,” Kingstone told The Epoch Times.
If Musk’s deal falls through, he says, there will be shareholder actions and litigation against senior management for allowing the deal to crater. And most importantly, he adds, if it is proven that Twitter has misled advertisers and shareholders about the number of subscribers and inactive users, the SEC will go after the top management of the company.
Kingstone assumes that Musk has factored all of this and now has leverage to negotiate a far better deal with Twitter.
Some shareholders may also be adamant about the matter, as one investor filed a lawsuit to force the social media platform to release internal files regarding spam bots.
John Solak submitted his case to the Delaware Chancery Court on June 7 and is seeking books and records “to investigate the possibility of board-level breaches,” according to court documents obtained by Bloomberg. Solak, who controls five Twitter shares, is also requesting documents relating to talks between Twitter executives and directors and if Musk harmed the business by denigrating personnel and the company’s efforts to “mitigate” the damage.
Lawsuits and Investigations
In addition, Twitter shareholders submitted a proposed class-action lawsuit against both Musk and the social media platform (pdf). The lawsuit claimed that Musk manipulated Twitter’s share price by making false statements, adding that he waived detailed due diligence before launching his takeover bid and was fully aware that Twitter had a certain amount of “fake accounts.”
The ubiquitous nature of bots has also made its way to the state government level.
In a separate development, Texas Attorney General Ken Paxton announced on Twitter that he will begin an investigation into Twitter “for potentially misleading Texans on the number of its ‘bot’ users.”
“I have a duty to protect Texans if Twitter is misrepresenting how many accounts are fake to drive up their revenue,” he wrote in a tweet on June 6.
Experts contend that the subject of bots is critical to the corporation’s investment value. Twitter is flouting basic aspects of financial arrangements, says Baruch Labunski, CEO of Rank Secure, a web development services firm.
“Twitter is violating the standard principle of all financial deals in that it isn’t opening its books to show Musk validation of its bot data,” Labunski told The Epoch Times. “Bots above the number projected would affect the platform’s investment value.”
Twitter’s board has a fiduciary responsibility, to make sure that directors are acting in the best interest of shareholders.
Given that Musk’s offer price of $54.2 per share represents more than 50 percent premium over what he paid when he began building his position in late January, Twitter management may be attempting to close the deal as quickly as possible. They also understand that no other bidder can match this offer.
In addition, the current valuation relative to earnings puts Twitter at a significant premium over Google and Meta (formerly Facebook).
Hence, many business commentators assert that Twitter might need Elon Musk more than he needs the website. If the deal falls through, they say, management will have fumbled the ball since it would reveal that the company inflated user numbers, proving that the platform is filled with bots.
Should Musk choose to ditch his Twitter campaign, the billionaire CEO of Tesla Motors and SpaceX would be on the hook for a $1 billion termination fee. However, this has been called into question since Musk noted that his offer was based on Securities and Exchange Commission (SEC) filings. But with Musk ostensibly waiving his right to due diligence, the legal wrinkles in this corporate saga have become paramount.
According to Twitter’s proxy statement, Musk made no attempt to get information about the issue of spam accounts in the run-up to the deal.
“Mr. Musk did not ask to enter into a confidentiality agreement or seek from Twitter any non-public info regarding Twitter,” the company stated.
Eric Dahan, the co-founder and CEO of Open Influence, a digital marketing agency, tells The Epoch Times that there are many “legal nuances and strategies” to determine if and how Musk could either renegotiate the deal or back out of the purchase.
For Twitter, it would not make sense for the company to exit the takeover bid or search for another buyer, he noted.
“Musk presented a really unique opportunity to the company that could have really helped revamp and catapult the social platform to the front of the pack. I think most other buyers can’t offer Twitter that same opportunity,” he said.
Wedbush analyst Dan Ives anticipated that Musk would use the bot issue to either negotiate a lower sale price or walk away.
“Speaks to our thesis over past few weeks that spam/bot issue was going to be the ‘material breach’ cited by Musk to try to get out of TWTR deal. $1 billion breakup fee; Twitter Board will fight this clearly. Help remove a major overhang on Tesla; Twitter stock be under pressure,” Ives wrote in a tweet on June 6.
What’s Next for Twitter?
Skepticism over Musk finalizing his purchase of the digital portal has ballooned this month. The odds of the purchase being called off could intensify at any moment, says Morningstar’s chief U.S. market strategist Dave Sekera.
“Musk’s announcement is the latest upset in a highly volatile merger story that’s rife with risks for investors,” he stated in a note in May. “One Twitter post can instigate a wave of selling pressure.”
Market analysts aver that Wall Street did not view the deal as something guaranteed to happen, as evident in the performance of Twitter shares from the beginning of the announcement.
Despite Musk’s offer of $54.20, the stock never reached that level. The closest the shares ever reached was $51.70 on April 25. The discount has widened to about 26 percent as of June 9.
While Musk’s purchase is not out of the realm of possibility, there is a great deal of uncertainty, added Sekera.
Nathan Solmose, the chief growth officer at SynerAI, an artificial intelligence platform for financial markets, forecasts that the stock would tumble from its present price of $40 to the 2013 initial public offering (IPO) price of $26, if the deal falls through.
Solmose told The Epoch Times that this would be disappointing news since the latest trends, from earnings power to industry competition, point to positive developments for the platform with Musk at the helm.
In May, Argus Research, an economic and investment research firm, had already downgraded its position on Twitter from “buy” to “hold,” warning that “U.S. regulators could balk at approving the sale of this forum for public disclosure to a single individual” or Musk might choose to abandon his purchase.
“We currently see more downside risk than upside potential in the stock, given these real possibilities,” Argus analyst Jim Kelleher wrote in a note.
Hindenburg Research had been skeptical for a while, alluding to the company’s weak quarterly figures and user numbers being overstated. Referencing the selloff on the Nasdaq Composite Index, Hindenburg estimated a Twitter price of $31.40 a share without a deal.
Both sides could be heading to litigation if the deal is off, according to Aron Solomon, the chief legal analyst at Esquire Digital.
“Twitter is dug in because they have to be. They rightfully state that the best thing for the shareholders is to ensure Elon Musk goes through with the purchase of Twitter at the agreed price,” Solomon told The Epoch Times.
“Whether Musk is also dug in is impossible to tell,” he added.
According to Solomon, the top executives may have already given as much information as they can to satisfy Musk’s demands. However, no matter what the percentage might be, Musk may be distrustful of the data.
“When both parties to a transaction distrust each other so much, it’s a yellow flag at least,” he said, adding that it’s possible that both sides may end up in court.