Why is Elon Musk really putting his deal on Twitter “on hold”?

Why is Elon Musk really putting his deal on Twitter “on hold”?

Elon Musk mentioned the bots when he announced the acquisition of Twitter with $ 44 billion “temporarily on hold”, but not everyone buys that explanation.

The richest man in the world posted on Friday that he was suspending his bid as he awaited further information to confirm whether the social media company’s quarterly estimates for its fake accounts were falling, causing Twitter shares to fall and raise questions about what exactly did musk mean.

Indeed, agreed transactions cannot be legally put on hold. Twitter lawyers are still working with Musk’s team to finalize the deal, said one person familiar with the situation. The billionaire himself said he was still “committed to the takeover”.

Some analysts have interpreted Musk’s maneuver as an attempt to force Twitter to return to the negotiating table to reach a cheaper deal as tech stocks cool or find a way out.

“Unless Twitter reported blatantly wrong data – which would be a serious security fraud – this could be a way to either negotiate a lower price or walk away,” said Stefano Bonini, a corporate governance expert at Stevens. Institute of Technology. “In any case, this shows that we are still very far from making this transaction.”

Social media companies have been trying to curb fake accounts that fill their platforms for a long time, bombarding users with unsolicited commercial messages, content or requests. In addition to spam and financially motivated scams, fake accounts can increase the number of followers, giving the impression of false popularity or develop into misinformation campaigns.

Musk’s tweet suggests concern that Twitter – which has long been battling complaints about its bots – has more fake accounts than it reveals. He highlighted a news item citing a recent company estimate that “less than 5 percent” of Twitter users are fake and unwanted accounts.

The number also appeared in every quarterly earnings entry since 2014, although Twitter warns that it is only an estimate and “could be higher”. It has also been challenged by some researchers – a 2017 study put the total at between 9 and 15 percent.

Twitter has occasionally cleared spam accounts and invested in systems to catch and eliminate others. But it has also rejected the researchers’ estimates and suggested the concern is excessive.

For Musk, who has more than 92 million followers on the platform and is regularly targeted by cryptocurrency fraudsters, the issue was a problem.

“If I had one dogecoin for every encryption scam I saw, we would have 100 billion dogecoins,” Musk said in an interview last month. He said one of his priorities for the platform would be to “defeat spam bots or die trying”.

“In general, we should be skeptical of user numbers, because there has to be an assessment and there is not enough authentication about whether you have to be human,” said Brian Wieser, global business intelligence president at GroupM.

He noted that Twitter was more encouraging to use nicknames compared to Facebook owned by Meta, which tries to link profiles to users’ real identities. “But it seems foolish to suddenly suggest that this is a new thing,” Wieser added.

A cheaper deal?

While the bot dilemma is not new, one thing has changed since Musk first introduced its offer: tech stocks are falling. The Nasdaq has fallen nearly 18% since Tesla CEO bought Twitter on April 14. The share price of the social media platform has fallen, but it has surpassed the technological index, mainly thanks to the offer of Musk.

Nathan Anderson, founder of short-selling company Hindenburg Research, said earlier this week that the fall in tech stocks gave Musk the leverage to reverse the deal to buy Twitter at a lower price.

“In our view, Musk has all the papers here,” Anderson said. “The board quickly agreed to the agreement when conditions were much more favorable and we believe they would make the right decision again when faced with the current reality.”

While few are aware of Musk’s real motives for challenging the deal, many analysts believe it is likely that he will try to reach more favorable terms.

“The $ 44 billion price tag is huge and could be a strategy to lower the amount he is willing to pay to acquire the platform,” said Susannah Streeter, a technology analyst at Hargreaves Lansdown.

Brent Thill, a technology analyst at Jefferies, agreed: “We believe Elon Musk is putting the deal on hold to negotiate a lower price.”

Once an agreement is reached, however, it is very difficult to persuade a board to accept a lower bid. The Delaware courts, which decide most corporate cases, have rarely allowed this to happen, unless agreed by both parties. Twitter’s board would risk being sued if it agreed to a lower price without good reason.

Musk could use what is known as a “substantial change” clause to force Twitter to come to the negotiating table and accept a lower bid. The bar for such a clause, however, is quite high. Many buyers tried to use them during the pandemic to reduce the price of the deals that had been agreed before the Covid-19 pandemic wreaked havoc on valuations. Few succeed.

One company that did so was LVMH, which asked the Tiffany jewelry store to reduce its selling price during the pandemic. As part of its strategy, the French luxury group threatened to withdraw from the transaction, claiming that Tiffany had made changes during the pandemic that violated its contractual agreement.

Some believe that Musk could try something similar. “Sometimes buyers can use new ‘problems’ as a basis for renegotiating the price of the deal – even if Musk is not contractually entitled to do so, a board may think it is easier to renegotiate it than to said Ann Lipton, an associate professor of business law and entrepreneurship at Tulane University.

Is Musk looking for a way out?

Another possibility is that Musk just wants to get away. Whether he could do it so easily will probably be a matter for the courts to decide.

Twitter has agreed a termination fee that could technically allow Musk to abandon his $ 1 billion acquisition. However, the social media company may also sue to force him to complete the transaction.

Much will depend on the circumstances. Daniel Rubin, a merger and acquisition lawyer at Dechert, the US corporate law firm, said Musk could not just leave paying the $ 1 billion termination fee, but could find a way to force Twitter to take cash and proceed.

“He can always create the conditions that will leave Twitter with no real choice but to quit and allow him to leave with an end that limits his liability even for a deliberate breach. [the terms of the deal]. “It’s essentially a walk to the right, with a few steps in between,” said Rubin.

Musk has secured funding for the deal, but is trying to reduce his $ 6.5 billion loan margin by inviting wealthy and institutional investors to support his equity bid. It recently raised $ 7.14 billion in investment from investors, including Oracle co-founder Larry Ellison, the Binance cryptocurrency exchange and asset management teams Fidelity, Brookfield and Sequoia Capital. However, it is still seeking more support.

It is not clear if he finds it difficult to do so and can see it as a way out of the deal, said one person familiar with the matter.

A longtime bargaining lawyer said Musk would likely be forced to complete the acquisition on Twitter on existing terms, noting that Delaware courts were almost generally rude to buyers who wanted to withdraw from the signed deals.

“Elon is a wild card for himself, but he may also be the most uniquely disliked defendant in a commercial lawsuit in history, including Carl Aikan,” the lawyer said.

Additional References from Sujeet Indap in New York

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