Twitter Shares Plunge as Elon Musk Reneges on Deal

Ticker Symbol: TWTR

The shares of social media giant company Twitter are down over 7% in this morning’s trading session after the deal the company struck with the Chief Operating Officer of Tesla, Elon Musk, fell through. Musk had made a bid to purchase the company for approximately $44 billion, or $54.20 a share in April, which the company accepted. The purchase price was at a 38% premium to the share price before the deal was announced and came during the sharp correction in global equity markets.

Twitter shares were last trading at $34.20, or exactly $20 below the agreed-upon deal price, representing a 37% discount on the purchase price. Given the current trading levels, Twitter is trading at the levels it was before Musk declared that he had become the company’s largest shareholder. In addition to being the founder of SpaceX, Musk also possesses one of Twitter’s most active and popular accounts, with over 100 million followers.

Objections to the deal from Musk’s side started almost immediately after he announced his intention to purchase the company. The world’s richest man, with an approximate net worth of approximately $200 billion, main gripe centered around the prevalence of “bot” accounts on Twitter’s platform. Musk indicated through his lawyer on Friday when he officially announced he was pulling out of the deal that Twitter could not satisfy him that spam and fake accounts only comprise 5% of Twitter’s daily active users.

The saga over the bot accounts centers around how the company defines, identifies, and labels bot accounts. While Twitter has held for years that it believes only 5% of accounts on the platform are fake, Musk has stated his belief that the number could be substantially higher. A fake account would lessen the “real” userbase of Twitter and thus make it less appealing to advertisers, lowering the rates that Twitter charges large companies to advertise on its platform. Musk has not offered concrete reasons for why he believes fake accounts could be higher than 5%.

Based on the legalese used when the deal was consummated, Twitter’s Chairman has said that the company will sue Musk to force him to go through the purchase. A protracted legal battle between the sides now looks likely and Musk could also be on the line to pay Twitter a $1 billion breakup fee. For Twitter, the protracted deal talks have likely sapped employee morale and may have significantly affected management’s focus during the second and third fiscal quarters. Furthermore, Musk could also abandon using the platform if the court case turns ugly.

Given the recent fall in the valuations of technology companies, Twitter’s share price could also be headed lower if Musk can’t be forced to buy out the company. Valuations of comparative firms such as Facebook, Pinterest, and Snapchat have taken a steep haircut. Twitter trades at a hefty premium to the earnings, sales, and operating income multiples of these other social media stocks. Lastly, Twitter has also struggled lately to grow its user base and missed Wall Street’s expectations for revenue and earnings outlook.

This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.