Twitter Deal Collapse Could Be a ‘Disaster’ for the Stock

Text size

Tesla

CEO Elon Musk’s move to terminate his $44 billion deal to purchase

Twitter

is likely bad news for the social-media company, no matter how a potential legal battle plays out. Shares of

Twitter

have fallen 18% since Musk first made the offer while portraying the company in a harsh light by focusing on the number of fake accounts on

Twitter
.

Wedbush analysts Daniel Ives and John Katsingris called the termination of the deal “a disaster scenario for Twitter,” adding that they anticipate an “elongated court battle” between Twitter and Musk. On Saturday morning, the analysts revised their 12-month target price for Twitter shares (ticker: TWTR) to $30, down from $43, and restated their Neutral rating.  Another analyst, Trip Chowdhry of Global Equities Research, has an even lower price target for the stock of $20.

In a July 8 filing with the Securities and Exchange Commission, Musk said he was terminating the April 25 merger agreement to buy the company for $54.20 a share on the grounds that Twitter was in “material breach” of several of its provisions.

Twitter responded to the filing by saying, “We are committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plan to pursue legal action to enforce the merger agreement.”

Elon Musk didn’t respond to Barron’s requests for comment via his lawyer or Tesla (TSLA) representatives over the weekend. Musk spoke at the Allen & Co conference in Sun Valley, Idaho on Saturday, but didn’t address the Twitter deal, Reuters reported.

At the heart of Musk’s stated concerns are the number of fake accounts on the site. Twitter has said it estimates that less than 5% are spam bots, but Musk has suggested that as many as 20% of Twitter’s global monetizable daily active users (mDAUs) are fake or spam accounts. Musk’s Friday filing stated that Twitter hasn’t provided enough data for an independent assessment of such accounts, despite repeated requests for that information.

Twitter didn’t respond directly to the criticism, but in June it gave Musk access to its “firehose” of data associated with its tweets. CEO Parag Agrawal tweeted in May that the requested information could not be supplied, writing, “we don’t believe that this specific estimation can be performed externally, given the critical need to use both public and private information (which we can’t share). Externally, it’s not even possible to know which accounts are counted as mDAUs on any given day.”

The deal also included a $1 billion termination fee that Musk would be required to pay if it didn’t go through. But Twitter is likely to demand the agreement’s full, $44 billion price, Tulane Law School professor Ann M. Lipton told Barron’s in an email. “Twitter has little reason to settle for the termination fee; its legal position is too strong,” Lipton said.

Musk’s claims that Twitter made false representations aren’t a basis for walking away, Lipton added. Musk would “have to show that the representations were so false that they would have a long term, significant impact on Twitter’s finances, and right now there’s no evidence that that is the case.”

In the nearly three months since Musk’s deal with Twitter was announced, the social-media company’s shares have suffered. On the day Twitter accepted the deal, the stock closed at $51.70. As of Friday’s close, it had fallen to $36.81, representing a 29% drop. Shares dropped an additional 4.8% in after-hours trading Friday. Ives and Katsingris, the Wedbush analysts, said they expect Twitter stock to open on Monday in the range of $25 to $30.

The news impacts more than just Twitter shares, which are down 14.8% year to date. Tesla stock rose about 2.3% in after-hours trading on Friday following the announcement. Barron’s previously reported that the end of the Twitter deal could help Tesla shares.

For Twitter investors who have watched shares sink since the social-media company accepted Musk’s deal, a legal battle isn’t the only concern. The Wedbush analysts said Twitter management will have to deal with a plethora of issues, from employee turnover to strategy changes, following “this earthquake unleashed last night.”

Write to Shaina Mishkin at [email protected]