Elon Musk puts his Twitter deal on hold

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

TSLA 5.37%

chief executive linked to a May 2 Reuters report on a recent filing of securities on Twitter 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 was willing to pay for the company last month. After Mr. Musk’s first tweet, its premarket share fell more than 20%.

Twitter did not respond to a request for comment.

The tweets come as many major technology stocks on Wall Street have fallen, including shares of Tesla, which are down 29% in the past month through Thursday. Mr. Musk is using his Tesla stock to fund the Twitter deal. Meanwhile, Twitter’s stock price had traded below Mr. Musk’s offer price, as investors wondered whether the deal might be reworked or not finalized.

According to Daniel Ives, a technology analyst at Wedbush Securities, Musk could use Twitter’s recent disclosure to either get out of the deal or renegotiate. One reason is the impact on Tesla stock since the deal was announced.

“Taking advantage of its stock and potential Tesla sales is a huge oversupply,” said Mr. ives.

If the deal falls apart, Mr. Musk could owe Twitter $1 billion, depending on the reason for the breakup. The level of the splitting fee, at just over 2% of the deal value, is about average for comparable transactions. The penalties, also known as termination fees, are designed to discourage parties from breaking agreements and address the costs and inconvenience of a failed deal.

While negotiating the deal, Mr. Musk forgoes detailed due diligence on Twitter in order to get to an agreement more quickly, which could make it more difficult for him to reverse something like a discrepancy in spam accounts. If he tries, the company may try to force him to close the deal under a legal protection called “specific performance,” although that maneuver is rarely successful in practice.

In 2020, luxury goods conglomerate LVMH Moët Hennessy Louis Vuitton SE tried to pull out of a deal to buy Tiffany & Co. for $16.2 billion after the pandemic affected demand for high-end jewelry. Tiffany filed a lawsuit to enforce the agreement, and LVMH countered, arguing that the company had been damaged so badly 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 lawsuits.

Mr Musk’s first tweet on Friday could be seen as a criticism of Twitter, which could complicate matters further. The merger agreement allows him to tweet about the deal as long as he doesn’t discredit the company or any of its representatives.

Before Friday, during meetings with Twitter, Mr. Musk appeared to be making progress on the deal and had not attempted to restart negotiations, but had started asking questions about the number of spam accounts on the platform, people familiar with it said. the matter . A Twitter spokesperson said Mr Musk had visited the company on May 6 as part of the transaction planning process.

Twitter said in its most recent quarterly report that it is estimated that fake or spam accounts accounted for less 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 sample of accounts and that “the actual number of fake or spam accounts could be higher than we’ve estimated.”

Mr. Musk had vowed to stamp out 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 and broadly inclusive forum in the world!” he tweeted earlier this month. “That’s why we need to clean up bots, spam and scams. Is there something that is public opinion or just someone running 100,000 fake accounts? At this point you don’t know yet.”

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

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

The question of how accurate the user numbers that social media companies share is an important one, because those numbers help inform advertisers about their spending decisions.

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

Questions about fake accounts and bots are also tied to how Twitter monitors content on its platform — another topic highlighted by Mr. Musk in recent weeks. He has indicated that he wants to reduce content moderation efforts.

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

Facebook owner Meta Platforms Inc. said last year it had spent more than $13 billion on “safety and security” since 2016 and committed 40,000 people 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 is inconclusive about spending or the number of employees working in this area.

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

Mr Musk’s tweets from Friday are the latest twist in the unorthodox attempt to take over the social media giant by the world’s richest man. It started with Mr. Musk buying a large chunk of Twitter stock in the open market as a passive investor earlier this year, which quickly turned into a full-fledged takeover bid, detailed in a four-paragraph letter and several text messages to the chairman. from Twitter.

The $54.20 offer price per share contained a veiled reference to marijuana. The last bomb comes on a superstitious date: Friday the 13th.

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

Meanwhile, federal regulators are investigating Musk’s late disclosure last month of his significant stake in Twitter, a delay that allowed him to buy more shares without notifying other shareholders of his ownership, The Wall Street Journal reported Thursday, citing people who be familiar with the matter. †

Mr. Musk made his application on April 4, at least 10 days after his bet crossed the disclosure trigger point. He has not publicly explained why he did not file a report in a timely manner. A lawyer for Mr. Musk did not respond to a message asking for comment.

Amid Mr Musk’s takeover bid, Twitter has faced disruptions in the digital advertising market caused by the global economic turmoil and the war in Ukraine. The company said Thursday it was halting hiring and looking to cut costs and announced the departure of two senior executives.

“Effective this week, we are suspending most hires and additions except for mission-critical positions,” Twitter chief executive Parag Agrawal wrote in a memo, which was reviewed by The Wall Street Journal. Twitter’s move adds to a wider tech industry upheaval in recent weeks, with several companies slashing staff cuts 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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