Elon Musk Puts His Twitter Deal on Hold

“Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” Mr. Musk said early Friday morning from his verified Twitter account. The Tesla Inc.

TSLA 5.13%

chief executive linked to a May 2 Reuters report about a recent Twitter securities filing with those statistics.

About two hours later, he posted: “Still committed to acquisition.”

Twitter shares fell 8.7% to $41.15 in morning trading, below the $54.20 a share, or $44 billion, that Mr. Musk agreed to pay for the company last month. The stock was down more than 20% in premarket trading after Mr. Musk’s first tweet.

Twitter didn’t respond to a request for comment.

The tweets come as many big tech stocks have been falling on Wall Street, including shares of Tesla, which have fallen 29% over the past month through Thursday. Mr. Musk is using his Tesla holdings to help fund the Twitter deal. Meanwhile, Twitter’s stock price had traded below Mr. Musk’s offer price as investors wondered if the deal might get reworked or not get done.

Mr. Musk might be using Twitter’s recent disclosure as a means to get out of or renegotiate the deal, said Daniel Ives, a technology analyst at Wedbush Securities. One reason is the impact on Tesla shares since the deal was announced.

“Leveraging his stock and potential sales of Tesla is a huge overhang on the stock,” Mr. Ives said.

If the deal does fall apart, Mr. Musk could owe Twitter $1 billion depending on the reason for the breakup. The size of the breakup fees, at just over 2% of the deal value, is about average for similar transactions. Also called termination fees, the penalties are meant to deter parties from breaking agreements and address the expense and inconvenience of a failed deal.

During negotiations for the deal, Mr. Musk waived doing detailed due diligence on Twitter’s business to reach an agreement faster, which could make it more difficult for him to back out over something like a discrepancy in the number of spam accounts. If he tries to, the company could attempt to force him to complete the deal under a legal protection called “specific performance,” though that maneuver is rarely successful in practice.

In 2020, luxury-goods conglomerate LVMH Moët Hennessy Louis Vuitton SE tried to back out of a deal to buy Tiffany & Co. for $16.2 billion after the pandemic hurt demand for high-end jewelry. Tiffany sued to enforce the agreement and LVMH countersued, arguing the business had been deeply so damaged that their original agreement was no longer valid. The two sides later agreed to cut the price by a relatively modest $430 million and settle related litigation.

Mr. Musk’s initial tweet Friday could be seen as critical of Twitter, which could further complicate things. The merger agreement stipulates that he can tweet about the deal so long as he doesn’t disparage the company or any of its representatives.

Before Friday, Mr. Musk had appeared to be moving forward on the deal in meetings with Twitter and hadn’t attempted to restart negotiations, but he had started asking questions about the number of spam accounts on the platform, people familiar with the matter said . A Twitter spokesman said Mr. Musk had visited the company May 6 as part of the transaction-planning process.

Twitter said in its most recent quarterly report that by its estimates, false or spam accounts represented fewer than 5% of its daily active users in the first three months of the year. The company reported the same figure in its February quarterly update.

The social-media company warned that its estimate is based on a sampling of accounts and that “the actual number of false or spam accounts could be higher than we have estimated.”

Mr. Musk had vowed to eradicate fake Twitter users and spam accounts as part of his bid to buy Twitter.

“There is so much potential with Twitter to be the most trusted & broadly inclusive forum in the world!” he tweeted earlier this month. “That is why we must clear out bots, spam & scams. Is something actually public opinion or just someone operating 100k fake accounts? Right now, you can’t tell.”

He also discussed the issue in a 2018 tweet: “Lots of fake accounts on Twitter characterized by high following/follower ratio to make it seem like many real people when it isn’t. Wonder why.”

Susannah Streeter, an investment analyst at Hargreaves Lansdown, said there will be skepticism whether the fake accounts are the real reason for the delaying tactic. “The $44 billion price tag is huge, and it may be a strategy to row back on the amount he is prepared to pay to acquire the platform,” she said.

The issue of how accurate are the user numbers that social-media companies share is a significant one because those figures help inform advertisers about their spending decisions.

“The social-media industry has no idea how many fake accounts are out there,” said Cascend Securities analyst Eric Ross.

Questions about fake accounts and bots also tie into how Twitter fonts content on its platform—another subject highlighted in recent weeks by Mr. Musk. He has indicated he wants to reduce content-moderation efforts.

Twitter’s efforts to combat fake accounts have lagged behind its peers, said MoffettNathanson analyst Michael Nathanson. “Twitter has never invested in content moderation the way that Facebook had,” he said.

Facebook owner Meta Platforms Inc. last year said it had spent more than $13 billion on “safety and security” since 2016 and had 40,000 people dedicated to the area. The company also said its artificial intelligence technology helped it block three billion fake accounts in the first half of 2021.

Twitter doesn’t break out spending or the number of employees it has working in this area.

Twitter also doesn’t bar users from having multiple personal accounts the way Facebook does. Facebook has said its single-account policy helps prevent impersonation and scams.

Mr. Musk’s tweets Friday are the latest twist in the unorthodox attempt to take over the social-media giant by the world’s richest man. It began with Mr. Musk buying a large chunk of Twitter shares on the open market earlier this year as a passive investor, which soon turned into a full-fledged buyout offer, outlined in a four-paragraph letter and several text messages to Twitter’s chairman .

The per-share offer price of $54.20 contained a veiled reference to marijuana. The latest bombshell comes on a superstitious date: Friday the 13th.

In addition to financing from Wall Street, Mr. Musk has had to sell at least $8.5 billion worth of Tesla shares to fund the deal. He has also assembled a cast of 19 investors, from a Saudi prince to Silicon Valley stalwarts, to put up another $7 billion.

Meanwhile, federal regulators are investigating Mr. Musk’s late disclosure last month of his sizable stake in Twitter, a lag that allowed him to buy more stock without alerting other shareholders to his ownership, The Wall Street Journal reported Thursday, citing people familiar with the matter .

Mr. Musk made his filing on April 4, at least 10 days after his stake surpassed the trigger point for disclosure. He hasn’t publicly explained why he didn’t file in a timely manner. An attorney for Mr. Musk didn’t respond to a message seeking comment.

Amid Mr. Musk’s takeover attempt, Twitter has been dealing with the disruptions in the digital advertising market from global economic turmoil and the war in Ukraine. The company said Thursday that it was pausing hiring and looking to cut costs and announced the departure of two senior executives.

“Effective this week, we are pausing most hiring and backfills, except for business critical roles,” Twitter Chief Executive Parag Agrawal wrote in a memo, which was viewed by The Wall Street Journal. Twitter’s move adds to broader upheaval in the tech industry in recent weeks in which several companies have been cutting staff and spending or slowing hiring.

Write to Sarah E. Needleman at sarah.needleman@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

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