Will Musk Work Out Better Deal With Twitter or Walk Away?

Will Musk Work Out Better Deal With Twitter or Walk Away?
Tesla CEO Elon Musk attends the start of the production at Tesla's "Gigafactory" in Gruenheide, southeast of Berlin, on March 22, 2022. Patrick Pleul/POOL/AFP via Getty Images
Andrew Moran
Emel Akan
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Elon Musk’s purchase of Twitter could be terminated if he’s not provided complete information about the actual number of fake and spam accounts on the social network, the billionaire has warned.

That’s forced investors to hit the sell button in the past couple of weeks. Twitter shares have erased all of their gains since the Tesla and SpaceX CEO announced a 9.2 percent stake in the company, which quickly evolved into a $44 billion takeover bid. Shares are trading at about $40, down 22 percent from their peak.

The San Francisco-based social media platform has experienced substantial volatility over Musk’s tweets, which have placed widespread doubts on his acquisition efforts.

What’s 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 would comply with Musk’s demands for internal numbers, giving him access to its full “firehose.” This would include 500 million tweets posted each day, according to the newspaper, citing an anonymous source close to the matter.
While Twitter has said bots represent fewer than 5 percent of its 219 million users, independent researchers claim the figure might be three times higher.
Musk’s legal team sent 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-per-share offer. That 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 Securities and Exchange Commission (SEC) filings.

While some on Wall Street believe Musk is using spam bots as a tactic to negotiate a better deal, some business leaders say Musk has the right to express concerns, and management should be held accountable if it’s proven that they’ve overstated actual user numbers.

Brett Kingstone, a tech entrepreneur and Florida businessman, believes Musk has crafted a “brilliant deal” rather than rushing into a terrible acquisition “to try to save freedom of speech.”

“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’s 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.

CEO, and chief engineer at SpaceX, Elon Musk, arrives for the 2022 Met Gala at the Metropolitan Museum of Art in New York on May 2, 2022. (Angela Weiss/AFP via Getty Images)
CEO, and chief engineer at SpaceX, Elon Musk, arrives for the 2022 Met Gala at the Metropolitan Museum of Art in New York on May 2, 2022. Angela Weiss/AFP via Getty Images
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 announcing 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 $54.20 per share represents a 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 Musk more than he needs the social media company. 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.

‘Unique Opportunity’

Should he choose to ditch his Twitter campaign, Musk could 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 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 digital marketing agency Open Influence, told 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 wouldn’t 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 said he anticipated that Musk would use the bot issue to either negotiate a lower sale price or walk away.

Elon Musk's Twitter profile on a smartphone placed on printed Twitter logos on April 28, 2022. (Dado Ruvic/Reuters)
Elon Musk's Twitter profile on a smartphone placed on printed Twitter logos on April 28, 2022. Dado Ruvic/Reuters
“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, Dave Sekera, Morningstar’s chief U.S. market strategist, said.
“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 say Wall Street didn’t view the deal as something guaranteed to happen, as evident in the performance of Twitter shares from the beginning of the announcement.

The stock never rose to the level of Musk’s per-share offer of $54.20, only going as high as $51.70 on April 25. The discount has widened to about 26 percent as of June 9.

While Musk’s purchase isn’t out of the realm of possibility, there’s a great deal of uncertainty, Sekera added.

Nathan Solmose, the chief growth officer at SynerAI, an artificial intelligence platform for financial markets, forecasts that the stock would tumble from its current level 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 called 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.”

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.

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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