Elon Musk says his deal to buy Twitter is on hold

“The Twitter agreement is temporarily suspended pending details supporting the calculation that spam/fake accounts actually represent less than 5% of users,” Musk said. tweeted Friday.

In its quarterly financial report, published on April 28, Twitter estimated that fake or spam accounts accounted for less than 5% of the platform’s active users in the first three months of the year. Twitter noted that the estimates were based on a review of sample accounts and it said the numbers were “reasonable”.

But he acknowledged that the metrics were not independently verified and that the true number of fake accounts or spam could be higher.

Twitter has had a spam problem for years, and the company has already recognized that reducing fake and malicious accounts will play a key role in its ability to continue growing. It’s unclear why Musk would pull out of the deal because of the latest disclosure.

A circus’

Musk turned “this Twitter circus show into a Friday the 13th horror show,” technical analyst Dan Ives of Wedbush Securities wrote in a note to clients early Friday.

Musk would owe Twitter a $1 billion severance fee if he canceled the deal.

“The Street will view this deal as 1) likely falling apart, 2) Musk negotiating for a lower price, or 3) Musk simply walking away from the deal with a $1 billion break fee,” Ives wrote. “Many will see this as Musk using these Twitter drop/spam accounts as a way out of this deal in a changing market.”

Stocks — tech in particular — have fallen sharply since Musk and Twitter reached an agreement to buy the company nearly three weeks ago.

Convention violated

The manner in which Musk announced the pause on the deal – in a tweet – was also unusual, at least by normal corporate M&A standards.

Acquirers of a company generally perform due diligence, a review of company finances and proprietary information, before entering into a transaction. During this process, they may come across information that causes them to rethink the deal or its valuation, but typically such a revelation would be disclosed in a filing with the Securities and Exchange Commission.

“Usually we would see some kind of filing that would come first, an amendment to previous filings on the deal, which says, ‘we have uncovered information in the due diligence process and are reconsidering our acquisition,’” said Josh White. , an assistant professor of finance at Vanderbilt University and a former SEC financial economist.

“It happens when you have access to the books and exclusive information. What doesn’t normally happen is a tweet,” White said.

The unusual move may not be significant enough to warrant SEC action, White said, but it could catch the attention of Twitter lawyers. As part of the deal, Musk agreed to check Twitter before making public statements about the deal, and to avoid making tweets that “disparage the company,” according to SEC filings. Still, Twitter’s board is likely to prefer the deal go through because of its high valuation relative to the company’s current stock price.

But if the deal falls through, “I would expect current Twitter shareholders to potentially take legal action,” saying Musk’s actions hurt them by driving the stock price down, White added. .

Twitter did not return a request for comment on Musk’s Friday tweets.

Skepticism from the start

Even though Musk has been pushing hard to secure funding for the takeover, skepticism that the deal will go through has swirled since Twitter’s board accepted the offer on April 26.

Wall Street analysts were also unconvinced of Musk’s ability to buy Twitter, at least not at $54.20 a share. The consensus target price was below $52, and the vast majority gave the company’s stock a “holding” rating.

Musk’s sale of a significant amount of Tesla stock to help fund his Twitter deal had also put pressure on the automaker’s shares. Having already committed much of its Tesla stock elsewhere, it didn’t have much cushion left if it needed more funds to complete the Twitter takeover.

Musk’s plans for Twitter

Musk had provided few details about his plans for the social media company, although he often spoke about bot accounts that promoted spammy content. He also says the company has been too quick to remove accounts that violate its content moderation rules.

Twitter CEO Parag Agrawal sent out a series of tweets on Friday afternoon acknowledging the company’s leadership shakeup the day before.

“Some have asked why a ‘lame duck’ CEO would make these changes if we got bought out anyway,” Agrawal said. “While I expect the deal to be completed, we must be prepared for all scenarios and always do what is right for Twitter. I am responsible for the direction and operation of Twitter, and our job is to build a stronger Twitter every day.”

— Clare Duffy and Allison Morrow of CNN Business contributed to this article.