Stock of the week: Twitter - Musk pulls out!

It has to be Twitter. In case you missed it, Elon Musk is trying to withdraw his bid to purchase the company. The lawyers must be licking their lips at the prospect of a long, drawn out legal battle.

Musk’s decision was widely anticipated amid speculation that he was significantly over-paying for the firm. The original offer was a $43 billion purchase at $54.20 per share. At the time this was a 38% premium above the trading price of ~$45.81.

Lately that price has been falling. And the price action didn’t inspire confidence on Friday after the news broke. Gapping down, back below the 20 day moving average and closing right on the lows of the day at $36.78.

Generally speaking, the sluggish stock performance isn’t just a reflection of Elon’s whims. The economy is slowing, Twitter is struggling to add users, and some analysts have suggested that social ad spending is likely to be cut (which Twitter relies heavily on for revenues) as companies tighten their belts.

But that’s not the reason Elon’s pulling out. According to the termination letter, the biggest issue is the prevalence of bots on the site, and persistent doubts over Twitter’s ability to determine how many monetizable daily user accounts (mDAU) they actually have.

Twitter insists that fewer than 5% of the stated mDAU are false or spam accounts. Musk’s team doubts the methods, and despite multiple requests they say they have been unable to obtain satisfactory answers or data to determine the genuine number of daily users. Nevertheless, the team ‘strongly believes’ that the number of bots is under-reported.

On top of this, Twitter’s recent firing of two high-ranking employees (Revenue Product Lead and the General Manager of Consumer) and a third of the talent acquisition team are cited too. Under the terms of the merger agreement, the company must “preserve substantially intact the material components of its current business organization.” Musk’s team claimed that the proper process was not followed.

For Twitter’s part, Bret Taylor, chairman of the board, tweeted that

“The Twitter Board is committed to closing the transaction on the price and terms agreed upon with Mr. Musk and plans to pursue legal action to enforce the merger agreement. We are confident we will prevail in the Delaware Court of Chancery.”

All pretty messy. Now it’ll be down to the courts to mediate and decide where this all ends up.

Unanswered (and unanswerable) questions remain. Is any of this genuine or merely a ruse to get out of the deal because circumstances have changed? Both Tesla and Twitter are worth less than they were in April.

It’s also possible that Twitter’s valuation was ‘protected’ by Musk’s buyout price. Since the Twitter deal was announced, Twitter is down by roughly 20%. Snap is down by roughly 57% and facing similar issues.

Some commentators have even suggested that the whole deal was a convenient cover story for Musk to sell Tesla stock without drawing scrutiny.

With the uncertainty set to continue for as long as the court battle endures, can Twitter’s share price ride out the storm?

Or is this an unwelcome distraction for a company already struggling to turn potential into real profit growth?

Not investment advice. Past performance does not guarantee or predict future performance.