After announcing a $44-billion Twitter deal last month, Tesla CEO Nikola Musk is now shelving the deal temporarily, citing “spam and fake accounts.” This news caused shares of Twitter to plunge 14% in premarket trading. Musk has often criticized Twitter’s moderators and has been critical of the service’s moderation. The deal is expected to close later this year.
In the meantime, the world’s richest man is weighing his options in the wake of the Twitter takeover. He has said he wants Twitter to change its content policy, get rid of fake accounts and turn its revenue stream into subscriptions. He also has said he’s “reluctant” to delete posts. The resulting uncertainty has investors wringing their hands. Musk has never denied his stance on free speech, but has said that he’s “very reluctant” to remove posts that he feels are inappropriate.
It’s unclear what exactly has prompted Musk to pull out of the Twitter deal. A week-old regulatory filing from Twitter said the move was a precautionary measure to ensure that false and spam accounts made up less than 5 percent of the company’s users during the first quarter. However, he later backpedaled and said that the deal remains on track. Nonetheless, investors are left wondering if Musk’s decision will hurt the company.
The company has already secured $13 billion in capital for the purchase. But now, banks are hesitant to extend additional financing because the company does not have enough cash flow to fund the deal. Musk has already pledged his Tesla shares to banks and arranged a $12.5 billion margin loan, but this may not be enough, as new investors show interest in the stock. While the news is not a surprise, the price of Tesla shares fell nearly a quarter in a month.
Elon Musk has a long-standing problem with fake accounts on Twitter. He has been vocal about the problem and has questioned whether Twitter was underreporting the true number of spam and fake accounts. A recent Reuters report said that Twitter estimated that false or spam accounts constituted less than 5 percent of its monetizable daily active users in the first quarter. Last quarter, Twitter had 229 million users and served ad to a billion people.
The company is now in talks with large investment firms and high net-worth individuals about preferred equity financing. If Musk decides to terminate the deal, Twitter will have to pay a one-billion-dollar termination fee. The company may also sue him to complete the deal. However, Musk’s decision to discontinue the deal could be temporary. It remains to be seen whether Twitter will pursue it in the future.
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