Tesla CEO Elon Musk promised that taking over Twitter would enable him to rid the social media platform of its annoying “spam bots." Now he's arguing — without presenting any evidence — that there might be just too many of those automated accounts for the $44 billion deal to move ahead.
The sharp turnaround by the world's richest man makes little sense except as a method to scuttle or renegotiate a deal that's becoming increasingly costly for him, experts said. And while such hardball tactics aren't uncommon in corporate mergers, the way this is playing out — in a highly public, seemingly erratic conversation on the very platform Musk wants to buy — has little precedent.
Which means that Musk is negotiating the future of Twitter ... on Twitter.
It's increasingly clear that Musk realizes his offer was too high and is looking for a way "to potentially walk away or negotiate the price down,” said Brian Quinn, an associate law professor at Boston College.
Early Tuesday, Musk tweeted that his deal to buy the company can't “move forward” unless the company shows public proof that fewer than 5% of the accounts on the social media platform are fake or spam bots. That followed Musk's Friday tweet that the deal was on hold pending more bot details — after which Twitter shares plunged by nearly 10% — and his Monday comments at a Miami conference suggesting he wanted a lower price for the company.
Experts say Musk can’t unilaterally place the deal on hold, although that hasn’t stopped him from acting as though he can. If he walks away, he could be on the hook for a $1 billion breakup fee.
Musk also spent much of Monday in a Twitter back-and-forth with Twitter CEO Parag Agrawal, who posted a series of tweets explaining his company’s effort to fight bots and how it has consistently estimated that less than 5% of Twitter accounts are fake. In one tweet, Musk responded with a poop emoji.
Twitter has disclosed its bot estimates to the U.S. Securities and Exchange Commission for years, while also cautioning that its estimate might be too low.
In his tweet Tuesday, Musk said that “20% fake/spam accounts, while 4 times what Twitter claims, could be much higher. My offer was based on Twitter’s SEC filings being accurate.” He added: “Yesterday, Twitter’s CEO publicly refused to show proof of 5%. This deal cannot move forward until he does.”
None of that makes sense, Quinn said. Not only has Twitter disclosed the uncertainty of its estimates for years, he said, “the company gave him the opportunity to engage in due diligence and kick the tires and look around.” Musk did not take up that offer.
Twitter declined to comment. The company said in a statement filed with the SEC on Tuesday that it is “committed to completing the transaction on the agreed price and terms as promptly as practicable.”
Getting cold feet about mergers is nothing new. It sometimes leads prospective buyers to look for changed conditions that can get them out of a deal.
It was the COVID-19 pandemic, in part, that led French luxury powerhouse LVMH, the parent company of Louis Vuitton and other luxury brands, to say it was abandoning a planned takeover of U.S. jeweler Tiffany & Co. in 2020. Tiffany sued to enforce the deal, and LVMH lashed back. In the end, the famed jeweler agreed to a slightly reduced buyout price.
The Twitter sale agreement allows Musk to get out of the deal if there is a “material adverse effect” caused by the company. It defines that as a change that negatively affects Twitter’s business or financial conditions.
Chester Spatt, a finance professor at Carnegie Mellon University and a former SEC chief economist, said Musk could claim that Twitter gave him wrong information about the number of spam bots. Even if the excuse doesn't hold up, it could serve as a negotiating tactic, he said. “A material adverse change is often the key to your ability to renegotiate the deal,” Spatt said.
Twitter shares have dropped below their trading price before Musk unveiled his bid. Tesla shares are also down over the same period, which affects Musk’s ability to raise money for the acquisition.
The whole string of Musk tweets will likely draw scrutiny from the SEC, which would probably look at whether the deal parties made any false or misleading statements, Spatt said. “The SEC doesn’t want to see manipulation of the public markets,” he said. “Their role is trying to help ensure that investors are getting a fair deal, to make sure the information out there is accurate.”
Musk, though, has made his statements in the open, and the SEC tends to be more concerned with concealed aspects of a deal, Spatt said.
Correct or not, Musk’s latest complaint about the bot count hits upon a sore point for Twitter, which has long faced criticism over a lack of transparency in its bot numbers. In the aftermath of revelations about Russian use of social media to meddle in the 2016 U.S. presidential election, a group led by University of Southern California researcher Emilio Ferrara estimated in 2017 that between 9% and 15% of Twitter’s active English-language accounts were bots.
In a blog post soon after, Twitter complained that such outside research “is often inaccurate and methodologically flawed.” Ferrara said that Twitter has taken a “frivolous” approach to this issue, especially compared to peers such as Facebook.
The bot problem also reflects a longtime fixation for Musk, one of Twitter’s most active celebrity users, whose name and likeness are often mimicked by fake accounts promoting cryptocurrency scams. Musk appears to think such bots are also a problem for most other Twitter users, as well as advertisers who take out ads on the platform based on how many real people they expect to reach.
“Twitter claims that 95% of daily active users are real, unique humans," he tweeted Tuesday. “Does anyone have that experience?"
Musk estimated Monday that at least 20% of Twitter’s 229 million accounts are spam bots, a percentage he said was at the low end of his assessment. At the same It was at the same All In Summit that Musk gave the strongest hint yet that he would like to pay less for Twitter than the $44 billion he agreed to last month.
“The chances of a deal ultimately getting done is not looking good now,” Wedbush Securities analyst Dan Ives, who covers both Twitter and Tesla, said in a research note. He estimated that there's “60%+ chance" that Musk ends up walking away from the deal and paying the $1 billion breakup fee.
Musk's offer to buy Twitter for $54.20 per share was made public on April 14. Twitter shares closed Tuesday at $38.32, up 2.5%..
In tweets on Monday, Agrawal acknowledged that Twitter isn’t perfect at catching bots. He wrote that every quarter, the company has made the estimate of less than 5% spam. “Our estimate is based on multiple human reviews of thousands of accounts that are sampled at random, consistently over time,” Agrawal wrote.
Estimates for the last four quarters were all well under 5%, he wrote. “The error margins on our estimates give us confidence in our public statements each quarter.”