The news initially sent Twitter shares down more than 20% in pre-market trading before the stock rebounded somewhat. Two hours after his first tweet, Musk posted that he is “still committed to acquisition.”
But it acknowledged that the measurements were not independently verified and the actual number of fake or spam accounts could be higher.
Twitter has had a spam problem for years, and the company has previously acknowledged that reducing fake and malicious accounts would play a key factor in its ability to keep growing. It’s unclear why Musk would back away from the deal because of the latest disclosure.
A ‘circus’
Musk turned “this Twitter circus show into a Friday the 13th horror show,” wrote tech analyst Dan Ives of Wedbush Securities in a note to clients early Friday.
Musk would owe Twitter a $1 billion breakup fee if he were to cancel the deal.
“The Street will view this deal as 1) likely falling apart, 2) Musk negotiating for a lower deal price, or 3) Musk simply walking away from the deal with a $1 billion breakup fee,” Ives wrote. “Many will view this as Musk using this Twitter filing/spam accounts as a way to get out of this deal in a vastly changing market.”
Stocks — tech in particular — have been sharply lower since Musk and Twitter reached a deal on a purchase of the the company nearly three weeks ago.
Flouting convention
The manner in which Musk announced the deal’s pause — in a tweet -— was also unusual, at least by normal corporate merger and acquisition standards.
Acquirers of a company typically conduct due diligence, a review of the firm’s finances and proprietary information, before a deal closes. In that 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’d see some sort of filing that would come first, an amendment to previous filings on the deal, that says, ‘we’ve uncovered some information in the process of due diligence and we’re reconsidering our acquisition,'” said Josh White, an assistant professor of finance at Vanderbilt University and a former financial economist for the SEC.
“This happens as you get access to the books and access to proprietary 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 draw the attention of Twitter’s lawyers. As part of the deal, Musk agreed to consult with Twitter before making any public statements about the deal, and to avoid making any tweets that “disparage the company,” according to filings with the SEC. Still, Twitter’s board will likely prefer the deal to go through because of its strong valuation compared to the company’s current stock price.
But if the deal falls apart, “I would expect Twitter’s current shareholders to potentially bring a lawsuit” saying Musk’s actions had damaged them by tanking the stock price, White added.
Twitter did not return a request for comment on Musk’s Friday tweets.
Skepticism from the start
Even as Musk has worked to secure financing for the takeover, skepticism about whether the deal would go through has been swirling since Twitter’s board agreed to the offer on April 26.
Wall Street analysts weren’t convinced of Musk’s ability to buy Twitter, either — at least not at $54.20 a share. The consensus target price was below $52, and the vast majority put a “hold” rating on the company’s stock.
Musk’s sale of a significant number of Tesla shares to help finance his Twitter deal had also put pressure on the carmaker’s stock. Having already committed a big chunk of his Tesla shares elsewhere, he wasn’t left with much of a cushion should he need to pony up more funds to complete the Twitter takeover.
Musk’s plans for Twitter
Musk had offered few details about his plans for the social media company, though he has often spoken out about bot accounts that promoted spam content. He also says the company has been too quick to remove accounts that violate its content-moderation rules.
Twitter CEO Parag Agrawal sent a series of tweets Friday afternoon acknowledging the leadership shakeup at the company the previous day.
“Some have been asking why a ‘lame-duck’ CEO would make these changes if we’re getting acquired anyway,” Agrawal said. “While I expect the deal to close, we need to be prepared for all scenarios and always do what’s right for Twitter. I’m accountable for leading and operating Twitter, and our job is to build a stronger Twitter every day.”
-— CNN Business’ Clare Duffy and Allison Morrow contributed to this article.
