Elon Musk cited bots when he declared the $44bn takeover of Twitter "temporarily on hold", but not everyone is buying that explanation.
The world's richest man on Friday tweeted that he was pausing his bid as he awaited further information to confirm whether the social media company's quarterly estimates of its fake accounts were accurate, sending Twitter shares falling and raising questions about what, exactly, Musk meant.
Indeed, agreed transactions cannot be legally put on hold. Twitter's lawyers are still working with Musk's team to complete the deal, said one person familiar with the situation. The billionaire himself said he was still "committed to the acquisition".
Some analysts have interpreted Musk's manoeuvre as an attempt to force Twitter back to the negotiating table to get a cheaper deal as tech stocks cool, or to find a way to pull out.
"Unless Twitter grossly misreported data — which would be a serious security fraud — this might be a way to either negotiate a lower price or walk away," said Stefano Bonini, a corporate governance expert at Stevens Institute of Technology. "At any rate this shows that we are still quite far from this transaction happening for real."
Social media companies have long tried to rein in the bogus accounts littering their platforms, bombarding users with unsolicited commercial messages, content or requests. Beyond financially motivated spams and scams, fake accounts can boost follower counts, giving the impression of false popularity, or be deployed in disinformation campaigns.
Musk's tweet suggested concern that Twitter — which has long battled complaints about its bots — has more fake accounts than it discloses. He highlighted a news story citing a recent estimate from the company that "fewer than 5 per cent" of Twitter's users are fake and spam accounts.
The figure has also appeared in each quarterly earnings filing going back to 2014, although Twitter cautions it is an only an estimate and "could be higher". It has also been disputed by some researchers — one study from 2017 put the total at between 9 and 15 per cent.
Twitter has carried out occasional purges of spam accounts and invested in systems to catch and eradicate others. But it has also dismissed researchers' estimates and suggested the concern is overblown.
For Musk, who has more than 92mn followers on the platform and is regularly targeted by cryptocurrency scammers, the issue has been a bugbear.
"If I had a dogecoin for every crypto scam I saw, we'd have 100bn dogecoin," Musk said in an interview last month. He has said that one of his priorities for the platform would be to "defeat the spam bots or die trying".
Brian Wieser, global president of business intelligence at GroupM, said: "Generally we should be sceptical of user numbers because estimation has to be made and there is no sufficient authentication of whether you have to be human."
He noted Twitter has been more encouraging of the use of aliases compared with Meta-owned Facebook, which tries to link profiles to users' real-world identities. "But it does seem disingenuous to suddenly suggest this is a new thing," Wieser added.
A cheaper deal?While the bot dilemma is not new, one thing has changed since Musk first floated his offer: tech stocks are sliding. Since the Tesla chief executive made an offer to buy Twitter on April 14, the Nasdaq has dropped nearly 18 per cent. The social media platform's share price is down but has outperformed the tech index, predominantly thanks to Musk's offer.
Nathan Anderson, the founder of short seller Hindenburg Research, said earlier this week that the tech stock rout gave Musk leverage to re-cut the deal to buy Twitter at a lower valuation.
"In our view, Musk holds all the cards here," Anderson said. "The board quickly agreed to the deal when conditions were vastly more favourable, and we think they'd make the right decision again when faced with the present reality."
While few know Musk's real motives for casting doubt on the deal, several analysts think it is possible he will try to get more favourable terms.
"The $44bn 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," said Susannah Streeter, an tech analyst at Hargreaves Lansdown.
Brent Thill, a tech analysis at Jefferies, agreed: "We believe Elon Musk is putting the deal on hold to negotiate a lower price."
Once a deal is agreed, however, it is very hard to get a board to accept a lower offer. Delaware courts, which rule on 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 serious justification.
Musk could use what is known as a "material adverse change" clause to force Twitter to come to the negotiating table and accept a lower offer. The bar for such a clause, however, is pretty high. Many buyers tried to use them during the pandemic to lower the price of deals agreed before the Covid-19 pandemic wreaked havoc on valuations. Few succeed.
One company that did was LVMH, which got jeweller Tiffany to lower its sale price during the pandemic. As part of its strategy the French luxury group threatened to walk away from the transaction, claiming Tiffany had made changes during the pandemic that breached its contractual agreement.
Some think Musk could be trying something similar. "Sometimes acquirers might use new 'problems' as a basis for renegotiating the deal price — even if contractually Musk is not entitled to do that, a board might think it's easier to renegotiate than litigate over it," said Ann Lipton, associate professor in business law and entrepreneurship at Tulane University.
Is Musk looking for a way out?Another possibility is that Musk is simply looking to walk away. Whether he could do so easily will probably be a matter for the courts to decide.
Twitter agreed a termination fee that could technically allow Musk to abandon his takeover for $1bn. However, the social media company can also sue to force him to complete the transaction.
Much will depend on the circumstances. Daniel Rubin, a mergers and acquisitions attorney at Dechert, the US corporate law firm, said Musk could not just walk away by paying the $1bn termination fee, but he could find a way to force Twitter to take cash and move on.
"He can always engineer the conditions that will leave Twitter with no meaningful choice but to terminate and allow him to walk away with a fee that caps his liability even for wilfully breaching [the terms of the deal]. It's essentially a walk right, with a couple of steps in between," Rubin said.
Musk has secured the financing for the deal but is trying to reduce his $6.5bn margin loan by inviting wealthy and institutional investors to back his bid with equity. He recently raised $7.14bn of funding from investors including Oracle's co-founder Larry Ellison, crypto exchange Binance and asset management groups Fidelity, Brookfield and Sequoia Capital. However, he is still looking for more support.
It is unclear whether he is struggling to do so, and might see this as a way out of the deal, said a person with knowledge of the matter.
A longtime deals lawyer said Musk would most likely be forced to complete the Twitter buyout under the existing terms, noting that Delaware state courts had been almost universally unkind to buyers seeking to walk away from signed agreements.
"Elon's a wild card unto himself but he may also be the most uniquely unsympathetic prospective defendant in a commercial litigation in history, Carl Icahn included," the lawyer said.
Written by: James Fontanella-Khan and Hannah Murphy.
© Financial Times