Where next for Twitter stock as Musk pulls out of $44 billion takeover?

Elon Musk pulls out of $44 billion Twitter takeover

Elon Musk has withdrawn his $44 billion takeover offer for social media platform Twitter. Musk had agreed to buy Twitter for $54.20 per share earlier this year. His plan was to take the social media platform private as he believed the company needed to undergo significant change that couldn’t be accomplished while it remained a publicly-traded and focused on growing value. 

The deal had been already put on hold while Musk evaluated Twitter’s user base and the number of fake and spam accounts on the platform.

Why has Musk pulled out of the Twitter takeover?

‘Mr Musk is terminating the merger agreement because Twitter is in material breach of multiple provisions of that agreement, appears to have made false and misleading representations upon which Mr Musk relied when entering into the merger agreement, and is likely to suffer a Company Material Adverse Effect,’ said Musk’s lawyers in a letter sent to Twitter.

Musk’s team claims Twitter has not supplied all the information and data that he has asked for, which it claims is a breach of their agreement. The central dispute that has hobbled the takeover is a disagreement about the number of spam and bot accounts on the platform. Twitter has long argued that less than 5% of its total users are fake, but Musk has signalled that it could be as high as 20%. That led to a dispute over how this could be verified and, despite Twitter supplying Musk and his team with ‘Fire Hose’ data, Musk says Twitter ‘has failed or refused to provide this information’ regarding fake accounts.

‘Sometimes Twitter has ignored Mr Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr Musk incomplete or unusable information,’ Musk’s lawyers said.

The letter sent to Twitter goes one step further by alleging that ‘several of Twitter’s public disclosures regarding its mDAUs (monthly Daily Active Users) are either false or materially misleading.’

It said Musk’s team has been able to complete a ‘preliminary’ analysis using the limited data it has been supplied and claims that fake accounts are ‘wildly higher than 5%’. It also claims that Twitter counts suspended accounts in its quarterly user figures.

Twitter aims to uphold original $44 billion deal

Twitter has said it plans to pursue legal action to force Musk to close the takeover at the current $44 billion price tag under the existing terms and said it is ‘confident we will prevail’ in the courts.

That has set the stage for what could be a lengthy legal battle. Musk agreed to pay a $1 billion breakup fee if he walked away from the deal but appears unwilling to pay that considering he is accusing Twitter of breaching the contract.

Notably, while Musk has claimed he doesn’t care about the economics of the deal ‘at all’ and said he was pursuing it to turn Twitter into a more trusted platform that is more inclusive, he has also conceded that the original price tag could be too high, especially if there are a greater proportion of fake accounts. Musk has previously said that striking a deal for Twitter at a lower price was ‘not out of the question’.

The battle is likely to centre on whether the courts believe Twitter has failed to provide enough information. Although Musk’s team claims Twitter has not supplied all the information it wants, Twitter is likely to argue that it has supplied everything it can. Twitter has said before that it was impossible for an external third-party to verify the number of fake accounts on its platform and is likely to argue that it responded to all reasonable requests.

Some experts have suggested Musk’s strongest argument could be that Twitter breached the agreement after letting go of some executives and laying-off 30% of its acquisition team after the agreement was made. He could also argue that he cannot secure the necessary funding because the number of fake accounts can not be verified.

What next for the Twitter takeover?

It is almost certain that we will now see Twitter and Musk enter a protracted legal battle. Twitter will fight for Musk to uphold the existing $44 billion deal and is now trying to make the world’s richest man to buy a company that he clearly doesn’t want, or at the very least thinks is overvalued. Musk will try to walk away without penalty (or at $1 billion) and claims the company is in a dire situation.

Twitter’s primary goal is enforcing the deal but has the option of looking to settle with Musk if it wants to avoid a potentially damaging legal battle. Or they could reopen negotiations, although Twitter’s board is less likely to accept a lower valuation than what has been agreed considering it doesn’t agree with Musk’s claims that the platform is plagued by spam accounts.

Where next for Twitter stock?

The $54.20 price tag has now been taken off the table, at least for now, and Twitter shares are likely to remain highly volatile until a resolution has been found. A lengthy legal case is likely to weigh on Twitter’s valuation. For now, investors are evaluating what Twitter’s true value should be without a takeover offer on the table, while Musk’s claims the company is in trouble will only add further pressure.

Twitter shares have only briefly touched the $54.20 offer price since it was made but swiftly fell as doubts grew over the deal. The stock has largely traded in a band between $35 and $40 since mid-May but is down over 5% in premarket trade today at $34.81 – the lowest it has traded since the takeover was launched and below the $39 it sat at before the offer was made.

We could see the stock slide to as low as $32 as new downward pressure emerges, marking the level of support seen in April and May 2020. That must hold in order to prevent opening the door to the pandemic-induced lows seen in March 2020.

On the upside, $54.20 will now act as a key psychological ceiling that is unlikely to be hit for some time, unless the board is successful at forcing Musk to pay the original price tag. The stock has struggled to sustain a move above $40 since severe doubts over the deal surfaced and this is also in-line with the 100-day moving average.

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