“Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users,” Elon Musk tweeted, just before 6 AM in New York on Friday.
He linked to a Reuters article dated May 2, which cited a familiar passage from Twitter’s 10-Qs.
Every quarter (or every recent quarter, anyway), the company includes a “note regarding metrics” which briefly describes “an internal review.” Using a sample, Twitter tries to estimate the percentage of mDAUs comprised of “false or spam accounts.” Invariably, the review puts that share at “fewer than 5%.”
But Twitter always includes a caveat. “The false or spam accounts for a period represents the average of false or spam accounts in the samples during each monthly analysis period during the quarter,” the filings invariably say, noting that Twitter “applie[s] significant judgment” when it makes the determination. The company then concedes that its estimates of spam accounts may not be accurate and that “the actual number of false or spam accounts could be higher than we have estimated.”
I think it’s fair to say a lot of people question the 5% figure, and I’d also note, in Twitter’s defense, that determining the true percentage of active users comprised of spam accounts is, for all intents and purposes, impossible.
None of that is new. It’s in every 10-Q going back years. Musk knows that, of course. He’s made no secret of his disdain for “spam bots,” but considering market conditions and, more to the point, where the shares were trading versus Musk’s offer as of Thursday’s close (figure below), one can’t help but wonder if he’s looking for an excuse to negotiate better terms, possibly in conjunction with some new consortium of investors.
The stock plunged in premarket trading following Musk’s announcement (red dot in the figure). It trimmed losses, but still closed nearly 10% lower on the session, bringing this week’s loss to more than 18%.
A few days ago, Hindenburg Research suggested the deal may be in jeopardy. “We are supportive of Musk’s efforts to take the company private, and believe he could get it done, but see no reason why he should at these levels,” the firm said, citing “significant risk” that the deal would ultimately be repriced lower.
The ongoing selloff in US tech shares had already lopped some $5 billion off the company’s market cap since Twitter accepted Musk’s offer late last month. With a single tweet, he wiped away another chunk.
Meanwhile, the ubiquitous “people familiar with the matter” told Bloomberg that Musk is attempting to strike a deal with investors that would give him enough in preferred equity financing to obviate the need for a margin loan against his Tesla shares.
Initially, he was poised to borrow $12.5 billion against his stock as part of the financing for Twitter. After securing more than $7 billion from Larry Ellison, Sequoia and some Mideast royals, he needed just $6.25 billion. That’s convenient. Because, when you take into account the drop in Tesla’s stock price (which the media has partly attributed to ambiguity around the Twitter deal) and Musk’s recent share sales, he wouldn’t have been able to cover the $12.5 billion with margin loans if Tesla dropped too far below $850. If he only needs $6.25 billion, that number is (ironically in this context) $420, according to Bloomberg.
With Twitter now trading at a huge discount to Musk’s offer thanks, in part, to Friday’s tweet, he would appear to have more leverage.
I’d be remiss not to gently note that some market participants might view this situation as untoward. Some might argue, for example, that Musk is leveraging Twitter against itself. Again. It’d be ludicrous to pretend he wasn’t aware that his Friday tweet might cause the stock to plunge, and while the (apparently stalled) deal includes a $1 billion fee if Musk were to pull out, that’d be a price worth paying if he can save multiples of that with better terms. I won’t pretend to know the legal ins and outs of such a gambit, but I doubt there’s any ironclad language that precludes Musk from pursuing some manner of money-saving end-around.
Additionally, Twitter is in a very poor position here, or at least in my opinion. Friday’s knee-jerk plunge in the shares following Musk’s tweet is probably indicative of what would happen in the event the deal falls apart and isn’t resurrected. And that’s to say nothing of what might happen to the stock if Musk walked away and then sold his 9% stake in the company.
Coming full circle, some will be skeptical of the notion that the sole motivation for Musk’s decision to “temporarily” place the deal on hold was a boilerplate disclosure in Twitter’s quarterly filings.
Later, Musk said he’s “still committed” to the deal. According to an internal memo, Twitter this week implemented a freeze on hiring and unveiled new cost-cutting measures. Some offers may be rescinded. Two senior leaders are departing the company, apparently at CEO Parag Agrawal’s request.