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Elon Musk says Twitter deal is on hold, putting bid on shaky ground

The Washington Post logo The Washington Post 5/13/2022 Faiz Siddiqui, Reed Albergotti, Elizabeth Dwoskin, Rachel Lerman
Tesla CEO Elon Musk has plans to acquire Twitter. © Joshua Lott/Getty Images Tesla CEO Elon Musk has plans to acquire Twitter.

SAN FRANCISCO — Elon Musk tweeted early Friday that his $44 billion bid to buy Twitter was temporarily on hold, opening up a potential door for renegotiation and raising uncertainty about his push to take the social media site private.

His declaration cast fresh doubt on the seriousness of his offer just as he was scrambling to find new investors to help him fund the deal. It also played into his hand by sending Twitter’s stock price tumbling, though the tweet had the potential to draw regulatory scrutiny.

“Twitter deal temporarily on hold pending details supporting calculation that spam/accounts do indeed represent less than 5% of users,” Musk tweeted, linking to a Reuters article last week citing a Twitter filing. Roughly two hours later, he added, “Still committed to acquisition.”

Spam bots, accounts that peddle cryptocurrency scams and otherwise seek to exploit vulnerable users, have long been a pet peeve of the technology mogul who regularly encounters impersonators in his activity on the site.

But his public declaration was an unusual and unexpected maneuver at this stage of the negotiations, according to financial experts and people familiar with the negotiations who spoke on the condition of anonymity to discuss sensitive matters. The deal was expected to close in the next three to six months, but the tweets Friday could represent an effort by Musk to return to the negotiation table to buy Twitter for less than previously agreed upon.

Here is what Elon Musk has said about his plans for Twitter

It also sent Tesla’s stock price, which had declined steeply this year, upward while Twitter’s stumbled. Musk owns a major stake in Tesla and had committed billions of dollars of his personal wealth toward funding the deal. The increase in prices Friday allowed Musk to recoup some of his net worth, while also reducing the market value of the company he is seeking to buy.

Twitter shares fell by nearly 10 percent Friday, while Tesla shares rose nearly 6 percent. Investors in the electric automaker, led by Musk, have been concerned about the billionaire leveraging his stake to fund the Twitter deal.

Musk’s cold feet over the concern that there might be more spam bots than he thought may represent an attempt to trigger a clause in the contract that allows the deal to be called off if an unforeseen event significantly hurts Twitter’s business prospects, according to legal experts and people close to the deal.

Still, at least one person familiar with the negotiations cast doubt on the impact of Musk’s strategy. “We haven’t seen one iota of evidence that the deal is on hold,” said the person, who spoke on the condition of anonymity to describe the discussions. “Things continue today just as they were yesterday.” Bots would be a “routine” subject of discussion for such a deal, the person said.

Musk’s question about bots is nothing new for Twitter

Urska Velikonja, a law professor at Georgetown University, said of the saga: “Anyone trying to predict how this ends up is a fool.”

Musk and Twitter did not comment for this article.

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Twitter continued to spiral into further management chaos this week, with chief executive Parag Agrawal firing two top deputies and announcing a hiring freeze. On Friday, Agrawal tweeted that he needed to cut costs because of the macroeconomic environment. “I won’t use the deal as an excuse to avoid making important decisions for the health of the company, nor will any leader at Twitter,” he said.

Musk’s statement that the deal was on hold had the potential to draw the eye of securities regulators, who would examine whether his public declarations about the deal while in active pursuit of the company ran afoul of securities laws.

Musk is prone to brash statements on Twitter, where he has more than 90 million followers, something that has drawn scrutiny from the Securities and Exchange Commission. The terms of the deal require a $1 billion breakup fee, though his tweet left some pondering whether he was seeking to circumvent that cost. And securities law experts said Musk backing out at this stage could result in a protracted and messy legal battle, leaving the tech mogul incurring costs well over the penalty for walking away.

Before the tweet, Musk already was seeking additional investors for the purchase as a market downturn put pressure on his financing. Advisers close to Musk, who spoke on the condition of anonymity because of the ongoing discussions, said the about-face was likely a negotiating tactic, but it also signaled possible buyer’s remorse.

Tesla has lost around $400 billion in market value since Musk’s interest in Twitter became public in April, driving a wedge in his acquisition plans at a time when he has committed $21 billion of his wealth to finance the purchase. Musk had planned to buy Twitter with a combination of loans and equity commitments, leveraging into the deal much of his stake in the most valuable automaker, from which he derives most of his wealth.

His net worth, which makes Musk the richest man in the world, has fallen by as much as roughly $50 billion in recent weeks, according to the Forbes wealth index. And Tesla stock has shed nearly 30 percent of its value in just the past month. Musk disclosed more than $7 billion of financing last week from sources including investment firms, the Oracle founder Larry Ellison, the cryptocurrency exchange Binance, the Qatar sovereign wealth fund, and Saudi Prince Alwaleed bin Talal.

Now Musk is seeking out additional investments beyond what he had initially planned, because of the economic downturn and the weakening of Tesla stock, according to people familiar with the negotiations who spoke on the condition of anonymity to discuss sensitive matters.

In part because of the downturn, Musk and the bankers involved in the deal have been under pressure to solidify partners, including Yahoo owner Apollo Global Management, which is expected to extend more than $1 billion of financing with a group of partners, according to one of the people.

CNBC also reported Thursday that angel investor Jason Calacanis was lining up investors to participate in the Musk ownership bid. Prospective investors who have spoken with The Washington Post said interest in the bid remains high because of the belief Musk would make good on his investment, despite his declaration that the economics of Twitter are not his concern.

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It would not be the first time Musk has tweeted something that moves the markets, and sometimes the practice gets him in trouble. Most famously, he tweeted in 2018 that he had secured funding to take Tesla private at $420 a share. The SEC fined him $20 million. Musk has also tweeted that Tesla is overvalued, and tweeted a poll asking the public whether he should sell a part of his Tesla stake.

“To do this in a tweet and not in a filing is unconscionable, and it sends the market into a circus show,” said Wedbush Securities analyst Dan Ives.

The problem of Twitter bots also is not new to Musk. He has cited ridding the social media site of spam bots, or automated accounts that often promote products or schemes, as one of his main focuses for improving Twitter.

“If our twitter bid succeeds, we will defeat the spam bots or die trying!” he tweeted last month. In a broadcast interview this week, he reiterated that the company needs to crack down on the bots and build trust with users.

Experts explained how Musk could seek to use the bot issue to renegotiate the price of the deal. “I can only say that in merger terms, it’s a fairly slender reed for canceling a deal,” said Ann Lipton, a law professor at Tulane University. “Sometimes this kind of thing is used as a basis for renegotiating a deal price, but again, unless the problem is having far more impact on Twitter financially than has been reported, it’s not strong ground for that, either.”

Lipton said that issues including user accounts usually would have been checked out before the sides agreed to a deal. The terms of Musk’s deal to buy Twitter allow him to tweet about his acquisition “so long as such tweets do not disparage” the company or any of its representatives.

Elon Musk gets help from technology titans in bid for Twitter

Musk has put Twitter between a rock and a hard place, said Velikonja, the Georgetown University law professor. If Musk walks away from the deal, Twitter would be forced into an expensive and lengthy legal battle to recover damages for the havoc Musk has wreaked on the company. If Twitter’s board renegotiates a lower price with Musk, it probably will face shareholder lawsuits claiming the company took a lower-than-necessary price.

Musk launched his ownership bid with a goal to promote “free speech” on the site, a stance some employees worry could lead to the rollback of safety policies the company has put in place to protect users online. In recent weeks, Musk has cautioned that he is not yet the owner of Twitter, although he has laid clear plans for the social media service, such as restoring the account of former president Donald Trump, who was banned after the Jan. 6, 2021, attack on the U.S. Capitol.

“If Twitter acquisition completes, company will be super focused on hardcore software engineering, design,” information security and server hardware, he wrote in a tweet last week, adding: “Also, work ethic expectations would be extreme, but much less than I demand of myself.” He said at a summit with the Financial Times on Tuesday that the ban on Trump was “a morally bad decision, to be clear, and foolish in the extreme.”

The deal also could be affected by outside factors, such as regulatory scrutiny from the Federal Trade Commission or the SEC. The Wall Street Journal reported Wednesday that the SEC was investigating Musk for late notification that he had purchased a 5 percent stake in Twitter.

Here are five reasons the Twitter deal could still fall apart

The Post previously reported that such a delay might have earned him $156 million. Musk has leveraged much of his Tesla stock as collateral for his loans, making the recent economic downturn a particular issue for his bid. Tesla has warned of the risks it faces because of the amount of Tesla stock Musk has committed as collateral.

Tesla stock was trading at under $770 on Friday, a slight recovery from earlier in the week, but well below the more than $1,100 mark from early April. A drop by several hundred more dollars could trigger requirements that would force Musk to sell some shares, analysts said.

At one point last year, he had committed over half of his shares as collateral, according to financial filings. Because the Twitter bid would only increase that exposure, Musk has faced pressure to reduce his equity commitment, according to people with knowledge of the matter who spoke on the condition of anonymity to discuss sensitive matters.

In its annual filing, Tesla was open about the potential risk. “If Elon Musk were forced to sell shares of our common stock that he has pledged to secure certain personal loan obligations, such sales could cause our stock price to decline,” according to the document.

“We are not a party to these loans,” the company wrote. If its stock price declined, Tesla wrote, Musk could be forced by banks to sell Tesla shares to meet his loan obligations. That could further depress the stock. “It becomes a spiral,” Ives said.

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