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 “remains committed to the acquisition.”
But it acknowledged that the measurements had not been independently verified and that the actual number of fake accounts or spam could be higher.
Twitter has had a spam problem for years, and the company has previously acknowledged that reducing fake and malicious accounts will play a key role in its ability to continue to grow. It’s unclear why Musk backed out of the deal due to the latest revelations.
Technical analyst Dan Ives of Wedbush Securities wrote in a note to clients early Friday about Musk’s “this Twitter circus show to the 13th horror show Friday.”
Musk will owe Twitter a $1 billion break-up fee if he cancels the deal.
“The Street would view this deal as 1) potentially collapsing, 2) Musk negotiating 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 a catcher using these Twitter registration/spam accounts as a way to get out of this deal in a wildly changing market.”
Stocks — tech in particular — have fallen sharply since Musk and Twitter reached an agreement to buy the company nearly three weeks ago.
The way Musk announced the deal was halted — in a tweet — was also unusual, at least by normal corporate M&A standards.
Usually, acquirers of a company conduct due diligence, reviewing the company’s finances and ownership information, before closing the deal. In the process, they may come across information that makes them reconsider or evaluate the transaction, but such disclosure is usually made on file with the Securities and Exchange Commission.
“Usually we see some kind of filing that will come first, an amendment to previous filings on the transaction, which says, ‘We disclosed some information in the due diligence process and we are reconsidering our acquisition,’” said Josh White, associate professor of finance at Vanderbilt University and a financial economist. Previously with the Securities and Exchange Commission.
“This happens when you get the books and access the proprietary information. What doesn’t usually happen is a tweet,” White said.
White said this unusual move may not be large enough to warrant the SEC’s action, but it could catch 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 posting any tweets that would “disparage the company,” according to the SEC. However, Twitter’s board of directors is likely to favor closing the deal due to its strong valuation compared to the company’s current share price.
White added that if the deal collapses, “I expect existing Twitter shareholders to file a lawsuit” saying that Musk’s actions hurt them by lowering the share price.
Twitter did not respond to a request for comment on Musk’s tweets on Friday.
Doubt from the start
Even as Musk worked to secure funding for the acquisition, doubts over whether the deal would go through have been cast since Twitter’s board approved the offer on April 26.
Wall Street analysts weren’t convinced Musk could buy Twitter either — at least not at $54.20 a share. The agreed target price was less than $52, and the vast majority have placed a “pending” rating on the company’s stock.
Musk’s sale of a large number of Tesla shares to help fund his Twitter deal also put pressure on the automaker’s shares. Having already committed a significant portion of his Tesla stock elsewhere, it doesn’t leave him much protection if he needs to raise more money to complete the Twitter takeover.
Musk’s plans for Twitter
Musk has given few details about his plans for the social media company, although he has often talked about bot accounts that have promoted spam. He also says the company has been very quick to remove accounts that violate content moderation rules.
Twitter CEO Parag Agrawal sent out a series of tweets on Friday afternoon acknowledging the change of leadership in the company the day before.
“Some have been wondering why a ‘lame duck’ CEO would make these changes if we were acquired anyway,” Agrawal said. “While I expect the deal to go through, we need to be prepared for all scenarios and always do what’s right for Twitter. I am responsible for leading and operating Twitter, and our mission is to build a stronger Twitter every day.”
-— CNN Business Claire Duffy and Alison Morrow contributed to this article.