Tesla shares have lost about a quarter of their value since Musk disclosed a stake on Twitter on April 4, amid concerns he will get distracted as Tesla’s chief executive and that he may have to sell more Tesla shares to fund the deal. There is plenty of precedent for a potential renegotiation of the price following a market downturn. Several companies repriced agreed acquisitions when the COVID-19 pandemic broke out in 2020 and delivered a global economic shock. In one instance, French retailer LVMH threatened to walk away from a deal with Tiffany & Co. The U.S. jewelry retailer agreed to lower the price by $425 million to $15.8 billion. Acquirers seeking a get-out sometimes turn to “material adverse effect” clauses in their merger agreement, arguing the target company has been significantly damaged. But the language in the Twitter deal agreement, as in many recent mergers, does not allow Musk to walk away because of a deteriorating business environment, such as a drop in demand for advertising, or because Twitter’s shares have plunged. Musk is contractually obligated to pay Twitter a $1 billion breakup fee if he does not complete the deal, and the language in the deal contract appears to cap any damages that Twitter can seek from Musk to that level.
“Twitter deals temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” Musk told his more than 92 million Twitter followers. Twitter did not immediately respond to a request for comment. There was no immediate reaction from the investors that Musk tapped last week to raise $7.1 billion in funding. Musk tweeted a Reuters story from ten days ago that cited the fake account figures. Twitter has said that the figures were an estimate and that the actual number may be higher. The estimated number of spam accounts on the microblogging site has held steady below 5% since 2013, according to regulatory filings from Twitter, prompting some analysts to question why Musk was raising it now. “This 5% metric has been out for some time. He clearly would have already seen it… So it may well be more part of the strategy to lower the price,” said Susannah Streeter, an analyst at Hargreaves Lansdown. Twitter shares were down 16% at $38.06 in pre-market trading in New York, way below the $54.20 per share deal price. Shares of Tesla Inc were up about 5%.
But the contract also contains a “specific performance” clause that a judge can cite to force Musk to complete the deal. In practice, acquirers who lose a specific performance case are rarely forced to complete an acquisition and typically negotiate a monetary settlement with their targets. DEFEAT THE BOTS Musk has said that if he buys Twitter he “will defeat the spam bots or die trying” and has blamed the company’s reliance on advertising for why it has let spambots proliferate. He has also been critical of Twitter’s moderation policy and has said he wants Twitter’s algorithm to prioritize tweets to be public and was against too much power on the service to corporations that advertise. Nevertheless, Musk is targeting advertising revenue to more than double by 2028, according to slides he presented to investors that were reported by the New York Times. Ads are expected to make up about 45% of Twitter’s total revenue by that time, down from nearly all of its revenue today, according to the investor presentation. Earlier this week, Musk said he would reverse Twitter’s ban on former U.S. President Donald Trump when he buys the social media platform, signaling his intention to cut moderation.