Elon Musk announced on Friday that his $44 billion cash purchase for Twitter Inc is “temporarily on pause” till the social media company provides statistics on the proportion of fraudulent accounts.
Twitter shares plunged more than 20% in premarket trade, although they recovered some ground after Musk, the CEO of the electric vehicle market Tesla Inc, published a second tweet declaring he was committed to the deal.
In early trading on Friday, the shares were down 10% to $40.50, a significant discount to the acquisition price of $54.20 per share.
Musk, the world’s richest person, waived due diligence when he agreed to buy Twitter on April 25 in an effort to persuade the San Francisco-based company to accept his “best and last offer.” This could make it more difficult for him to claim that Twitter deceived him.
Since then, technology stocks have plummeted due to market concerns about inflation and a possible economic downturn.
As investors worried that the slump would drive Musk to walk or seek a lower price, the difference between the offer price and the value of Twitter shares expanded in recent days, signifying less than a 50% likelihood of completion.
“Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” Musk told his more than 92 million Twitter followers.
According to those familiar with the situation, Twitter has no immediate plans in response to Musk’s comment. According to the sources, the company considered the comment insulting and a violation of the terms of their deal contract, but was pleased when Musk later tweeted that he was dedicated to the acquisition.
The investors Musk recruited last week to raise $7.1 billion in fundraising had no immediate reaction.
Spam or phoney accounts are created with the intent of manipulating or artificially increasing activity on platforms such as Twitter. Some give the idea that something or someone is more popular than it is.
Musk mentioned the bogus account data in a Reuters piece from 10 days earlier. Twitter has stated that the figures were estimates and that the true amount is unknown.
According to Twitter’s regulatory filings, the estimated number of spam accounts on the microblogging site has remained below 5% since 2013, prompting some analysts to wonder why Musk was upping 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.
Tesla’s shares increased by 4% on Friday morning. Since Musk declared a stake in Twitter on April 4, the shares have lost approximately a quarter of their value, amid concerns that he may become distracted as Tesla’s CEO and that he may have to sell more Tesla shares to fund the transaction.
There is plenty of precedent for a possible price renegotiation following a market slump. When the COVID-19 pandemic broke out in 2020, causing a global economic shock, several firms repriced agreed-upon acquisitions.
In one case, French retailer LVMH threatened to cancel an agreement with Tiffany & Co. The jewellery retailer in the United States agreed to reduce the price by $425 million to $15.8 billion.
Acquirers looking for a way out may invoke “substantial adverse effect” clauses in their merger agreement, claiming that the target firm has been significantly harmed.
However, the language in the Twitter transaction agreement, as in many previous mergers, does not allow Musk to walk away due to a deteriorating business climate, like as a decline in advertising demand or a drop in Twitter’s stock price.
If Musk does not complete the purchase, he is contractually compelled to pay Twitter a $1 billion break-up fee, and the language in the deal contract appears to limit any damages that Twitter can seek from Musk to that amount.
However, the contract includes a “particular performance” language that a judge can invoke to compel Musk to finish the transaction.
In practise, acquirers who lose a specific performance case are almost never required to complete an acquisition and instead usually reach a monetary settlement with their targets.
“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.
(Adapted from BBC.com)