Elon Musk’s attempt to terminate his Twitter acquisition will likely force the social network into a protracted legal battle and send its stock price diving - thrusting a new level of chaos upon the firm, after months of public disputes have battered its reputation and employee morale.
In short? “This was worst case scenario for Twitter, and now it’s happened,” said Dan Ives, the managing director and senior equity research analyst covering the tech sector at Wedbush Securities.
Ives warned that Musk’s bid to walk away may make the company appear to be “damaged goods” in the eyes of other investors or potential acquirers. Twitter shares were down nearly 6% in after hours trading on Friday. Wedbush Securities projects the stock could sink to between $25 and $30 when the market reopens Monday, down more than 30% from where it closed Friday afternoon before Musk’s filing.
In a Friday evening news release, Twitter’s board threatened to “pursue legal action” to enforce the terms of the $44 billion deal Musk struck in April to buy the social network and take it private. He is required to go through with the purchase barring a major change to the business, which legal experts say is a difficult to prove.
Twitter’s board said that it was confident the company would prevail in court, but analysts warn - and employees fear - that Musk’s letter sets the stage for a turbulent period, which could carry new financial risks for the company and its workers.
The billionaire has been threatening to pull back from the deal for weeks, but Friday’s filing opens a new front in the dramatic takeover of the social network, which wields outsize influence over news coverage and politics. Musk’s lawyers have repeatedly accused Twitter of failing to turn over data to help his team confirm the number of bots or spam accounts on the social network, setting a stage for a legal battle. Meanwhile, the company maintains it has complied with all of the terms of its agreement and has turned over its “firehose,” a massive stream of data comprising more than 500 million tweets posted everyday. Legal experts say Musk’s case doesn’t meet a threshold to allow him to walk away from the deal.
Even if Twitter does prevail in recovering the deal or recouping a $1 billion breakup fee, a court battle invites new challenges. Twitter could be forced make key business metrics public, inviting questions from Wall Street about the overall health of the company, which turned its first profit in 2018 amid a major financial retooling.
Donna Hitscherich, a Columbia Business School professor, said Musk’s filing will naturally raise questions about why he lost interest.
“Is he a material kind of guy who just changed his mind?” she said. “Or is there something really there to what he said might be issues with the fundamental nature of the business?”
After weeks of threats, employees have largely been bracing themselves for Musk to formally attempt to walk. “This has been the direction of travel for a while,” said one employee, who spoke on the condition of anonymity to candidly discuss the situation within the company. “There’s been a general lack of belief that the deal would go through as signed.”
But its arrival only exasperated many workers, who say negotiations with Musk have brought intense scrutiny to Twitter. Any stock downturn would impact employee compensation, adding to the dismay of workers who have largely bristled at the prospect of the world’s richest man taking over their company. Since Musk announced his takeover, Twitter instituted a hiring freeze and has replaced key executives.
Twitter generally has a culture of transparency and open communication, the employee said, but because of the sensitivities around the deal, more information has been on lockdown. Those tensions could worsen if the deal goes to court.
That employee said their reaction to the twists and turns could be summed up most succinctly with a clown emoji.
Another employee, who previously supported the bid, described the situation as “totally depressing.”
“Musk is destroying Twitter,” said the person, who spoke on the condition of anonymity for the same reasons. “The best result for shareholders will be closing the deal at $54.20, even with a hostile owner.”
Musk began complaining about the bot issue soon after he agreed to purchase and take the company private this spring. In a May tweet, he said the deal was “on hold” and insisted the purchase could not “move forward” until Twitter provided further proof of its methods for detecting spam.
Musk committed to using more than $33 billion of his own wealth, which largely comes from his ownership of Tesla, to complete the deal. But as the stock market has been roiled by a global sell-of of tech stocks, Tesla share values plummeted in the wake of the deal. Twitter’s stock has dropped 30% since Musk made his acquisition announcement, when it traded at $52.
Anticipating more scrutiny of the role of bots in the deal, Twitter gave a Thursday morning background briefing to reporters. The core of the presentation was about how Twitter calculates its estimate that unwanted bots make up less than 5% of what it terms Monetizable Average Daily Users, those which the company feels comfortable charging advertisers to reach.
Twitter does not ban all bots, which include purposeful automated accounts, such as those that post otter pictures on the hour or the temperature in a specific location. Instead, it is looking for indicators that include mass creation accounts or coordination among humans to artificially amplify a tweet, set of tweets or topic.
The company stressed that the firehose is not enough to understand the state of bots on the platform. Twitter alone can see all the private data, including the phone numbers or email addresses used to register accounts, which would corroborate whether an account is fake. Other critical information includes the IP address and the software configurations of the device using each account, which can pinpoint a single machine behind multiple personas.
Such statements appeared aimed at heading off declarations by Musk that of the firehose of tweets he has received, a large percentage seemed automated or coordinated. Indeed, Musk’s Friday night termination notice claimed that Twitter had not been provided him enough data about how it samples the user base.
Twitter’s experts acknowledged that individual user might feel that much more than 5% of their feed is unwanted content. That is, in part, because the company is measuring and disclosing problematic accounts, not their activity or impressions - so a small number of accounts might have a large footprint of views, especially among spam-heavy topics like crypto. Many others have questioned Twitter’s estimate in the past, including numerous academics.
Politicians and advocacy groups are closely scrutinizing disputes between Musk and the company because they recognize the deal’s outcome could have broad implications on the future of elections and political discourse.
Musk has said he would reverse the company’s ban on former president Donald Trump, which Twitter instituted shortly after the Jan. 6 attack on the U.S. Capitol, citing the “risk of further incitement of violence.” His plans have been celebrated by conservatives, who accuse the company of censoring political speech, and impugned by liberals, who say his self-proclaimed free-speech absolutist positions could allow harassment and misinformation to run rampant on the platform.
A left-leaning watchdog group said Musk’s filing highlights why the deal has been fraught from the start. “While the fallout from Musk’s latest move still unfolds, one thing is clear: this chaotic crusade is nothing short of a five-alarm fire drill,” said Accountable Tech Co-Founder and Executive Director Nicole Gill in a statement. “Our information ecosystem, safety, and democracy cannot remain at the whim of unaccountable billionaires - whether it’s Elon Musk or anyone else.”
Meanwhile, conservatives said the blow-up supported their growing push to regulate content moderation of social media at both the state and national level. “The richest man in the world couldn’t even pull this off,” said Kara Frederick, the director of the Tech Policy Center at the conservative Heritage Foundation, in a Fox News interview Friday night. “It’s time to start talking about policy solutions.”
One of the Twitter employees said there have been discussions within the company about conservatives’ concerns with the platform, which employees are working to address, regardless of the outcome of the sale.
Still, the public debacle is unlikely to settle down.
“It was a political firestorm that Musk inserted himself into and now there’s going to be many of twists and turns again,” Ives said. “You can’t put the genie back in the bottle.”