Elon Musk's Deal to Buy Twitter for $44B is Put ‘On Hold' as Tesla Loses $400B in Market Cap Since the Plans Were First Made Public
Tesla Chief Executive Elon Musk is apparently getting cold feet after agreeing to purchase social media platform Twitter last month for $44 billion. As the world's richest person, Musk has the means to follow through with his plans, but it appears that he's not too keen on putting up most of the cash himself.
On Friday, Musk tweeted that his $44 billion deal to purchase Twitter was "temporarily on hold". He said he was waiting for data on the number of fake accounts on the platform, which sent Twitter shares down by nearly 10% to $40.49 on Friday.
In pre-market trading in New York, Twitter shares plunged by 16%, reaching $38.06, which is far below the $54.20 per share deal price. From a business perspective, the deal seems like a poor decision, no matter how much money Musk has. But on the bright side, Shares of Tesla were up about 5% on Friday, gaining back some $400 billion, or 25% of market cap that the automaker lost since Musk announced his plans to buy Twitter in early April.
Although Musk added that he was still committed to the follow through on the deal to buy the company, he waived the standard process of doing due diligence on the company when he agreed to buy Twitter on April 25. The decision was intended to get Twitter to accept his "best and final offer" of $44 billion.
A year ago, General Motors was criticized for not doing the proper due diligence after the automaker agreed to invest $2 billion in electric truck startup Nikola Motor Co, which included plans to manufacture the company's Badger pickup truck.
Well known Wall Street short seller Hindenburg Research published a scathing report after GM's investment in the company. Hindenburg said it had collected evidence to show Nikola CEO and founder Trevor Milton made false claims about the company's proprietary hydrogen fuel cell technology to form partnerships with large automakers like GM.
Six months later, Milton resigned from the company he founded after claims of nepotism and fraud that sparked a U.S. Security and Exchange Commission (SEC) investigation.
Milton was eventually indicted for deceiving investors and making false and misleading statements. Luckily for GM, the automaker was able to back out of the $2 billion deal, which pales in comparison to Musk's $44 billion commitment to buy Twitter.
The additional problem for Musk is that Twitter's value has dropped since he made the offer, which makes the agreed upon purchase price a bad deal, at least on paper. Many investors assume that Musk will either walk away from the deal entirely or attempt to negotiate a much lower price for the company.
"Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users," Musk tweeted to his 92 million Twitter followers on Friday.
Musk was referring to a Reuters story from ten days ago that cited the fake account figures. Twitter has said that the figures were only an estimate and that the actual number of fake accounts may be much higher.
In Twitter's own regulator filings, The estimated number of spam or bot accounts on the site has remained below 5% since 2013. Which led some analysts to question why Musk suddenly believes its much higher.
"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," Susannah Streeter, an analyst at Hargreaves Lansdown, told Reuters on Friday.
Others believe that Musk won't be able to handle the additional workload of running a large social media platform like Twitter in addition to his roles as the head of electric automaker Tesla and Space X.
If the deal to acquire Twitter falls through, which many believe will, Musk is contractually obligated to pay a $1 billion break-up fee. However, according to Reuters, the contract also contains a performance clause that a judge can cite to force Musk to complete the deal.
Tesla's 25.5% drop in market cap since Musk began entertaining the idea of buying Twitter appears to be the highest priority for him right now to address, rather than risking billions of his own fourtune and other inventor funds on a questionable deal.
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