Elon Musk may soon walk away from his $44 billion agreement to buy Twitter because he believes he does not have enough information to determine the level of fake accounts, according to published reports Thursday.
The world’s richest man claims Twitter’s spam accounts are not verifiable, the Washington Post reported, even after the social media giant in early June gave in to Musk’s demands to provide info on hundreds of millions of daily tweets.
Twitter, perhaps anticipating the Musk news, had a call early Thursday with select members of the media in which it said it removed 1 million spam accounts a day. The company also reiterated that fake users represent less than 5% of its user base, like it says in its quarterly earnings.
The mogul did not return calls from The Post seeking comment.
Musk in recent weeks has tweeted that his offer was based on Twitter’s SEC filings being accurate, adding that Twitter needs to prove to him the 5% number is correct before he can move forward. He has also said he suspects the number could be four times higher than reported.
Twitter’s media call early Thursday caused the company’s shares to rise 1.5 percent to $38.79.
“I think it was silly it was up because it felt like Twitter was doing this to get in front of something,” a hedge fund manager told The Post.
Shares plummeted more than 4 percent in after-hours trading to $37.17 following reports of Musk’s pulling out of the deal he struck in April.
If Musk were to announce he was walking away from the $54-a-share deal and paying a $1 billion break-up fee, the Twitter shares would likely fall another 10 percent to around $33 to $34 a share, the hedge fund manager said.
There is about a 33% chance Twitter would then sue to enforce the merger agreement and win, the hedge fund manager said.
Twitter with no deal or chance of winning a lawsuit would fall to about $25 a share, the manager said.
That means in the real world Musk is paying a better than 100% premium for Twitter, now that tech stocks have crashed in the last few months.
Musk agreed to buy Twitter for $44 billion on April 25 without due diligence, or examining its books. That was a 38% premium to where Twitter’s shares were trading before it was reported he had acquired Twitter shares.
To walk away from the deal and win in court, Musk likely would need to prove Twitter is committing fraud, sources said, knowingly reporting false spam account numbers in its filings.
A former Twitter ad engineer told Jefferies in a May analyst report seen by The Post it believed the 5% figure is close to the real number.
“I would be very surprised to learn that the 5% number was meaningfully different and the company knew it was meaningfully different,” the anonymous engineer said. “In other words, I do not think the company has intentionally lied to the SEC. There are a bunch of very smart people working on this and my inclination is that they mostly got this right. Are there things that they may not have caught, and could someone point and say the number is really 8-10%? Sure. But that seems within a reasonable margin of error in my view. Could it be 25-50%? I really doubt it.”
The former Twitter engineer said Twitter does a multi-day sampling and looks for where logins are occurring, and if logins are a part of an IP address cluster. Twitter also looks to see if users are scrolling or liking too many tweets at an unreasonably fast speed.
Then there is the logic of the situation.
“There is a lot of competition to attract advertisers in this billion-dollar market. But advertisers are not stupid. They are sophisticated buyers. So while it would be in Twitter’s interest to claim to have more users, advertisers would likely figure this out in due course based through their use of third-party analysis/validation.”
“Also, advertisers hire technically savvy employees that are aware/can evaluate the impact of bots on their ad campaigns.”
Google and Facebook too have hired former Twitter workers, the engineer said, who know how many fake accounts are on Twitter.
“Said another way, given all the employee cross-pollination in the online advertising space, it would be very difficult to “hide” a meaningfully inaccurate 5% bot count at Twitter,” the engineer said.
Separately on Thursday, Twitter laid off 30% of its talent acquisition team, which includes recruiters and represents fewer than 100 people, the Wall Street Journal reported.