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Why Elon Musk’s bid to buy Twitter is looking increasingly shaky

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Elon Musk’s deal to buy Twitter hit the rocks this week, after the controversial billionaire put his US$44 billion ($66 billion) offer on hold over concerns about the number of spam bots infesting the platform.

Mr Musk, who wants to transform Twitter into a bastion for free speech, fears the proportion of robot users on the platform is much higher than the company admits, even suggesting he may try to pay a lower price for the company unless its board addresses his growing concerns.

“It’s a big deal,” Mr Musk said in an interview this week. “It’s like, I agree to buy your house, you say the house has less than 5 per cent termites but if it turns out it’s 90 per cent termites.”

“It’s not the same house.”

But analysts and lawyers are questioning Mr Musk’s intentions, arguing he might be trying to scupper the entire deal because his capacity to fund a full buy-out of Twitter has fallen short.

Shares take a dive

The share prices of both Twitter and Tesla – the electric car giant Mr Musk has used to underpin his offer – have tanked in recent weeks, making the original deal far less attractive to Mr Musk.

It leaves the future of the buyout mired in uncertainty, with Twitter potentially facing a lengthy legal battle to hold him to his original deal, if the billionaire does indeed try to pull the pin.

Mr Musk’s position was also complicated on Friday when Insider ran a story about allegations he sexually assaulted one of his employees.

Musk has denied the allegations, suggesting they’re a political attack.

Mr Musk’s deal to purchase Twitter and take the company private is legally binding, but the billionaire’s decision to delay the process this week is within the terms of the purchase deal.

He claims fears about the number of bots on the platform as the key reason for the hold up, suggesting the company’s claims that just 5 per cent of its users aren’t human is wrong.

Twitter has long faced criticism over the estimated number of robot users on its platform, which some analysts think could be as high as 20 per cent of active accounts.

This matters, as RMIT University associate professor Angel Zhong explains. Because ultimately Twitter makes most of its money from ad revenue, which is dependent on human eyeballs.

“If this persists in the long run, Twitter will be losing actual users, which will negatively affects advertising revenue and revenue as a whole,” she said.

“Musk has the right to obtain factual information of the percentage of fake accounts.”

Bots and bogus numbers?

Twitter CEO Parag Argrawal attempted to quell Mr Musk’s concerns this week, tweeting about the company’s estimate that just 5 per cent of its users are bots and saying he was confident in the financial reports the company provides shareholders.

But he stopped short of sharing the methodology Twitter uses to calculate bots on its platform publicly, prompting Mr Musk to respond with a poop emoji to Mr Argrawal’s Twitter thread.

That response has prompted some experts to question Mr Musk’s intentions. Alejandra Caraballo, a US-based lawyer, suggested this week that the poop emoji may have even breached a disparagement clause in the buyout deal he signed with Twitter in early May.

Ms Caraballo and other analysts have suggested Mr Musk is using his concern about robot users on Twitter as an excuse to scupper the entire deal.

That’s because since Mr Musk and Twitter signed a legally binding purchase agreement, the financial calculus has changed drastically.

Mr Musk offered to purchase Twitter at US$54.20 a share, but since then the company’s share price has plunged to US$37.20 – raising the prospect that Mr Musk could be overpaying.

Meanwhile, shares in Mr Musk’s electric car company Tesla have also begun to fall drastically.

The business was listed at around US$1000 ($1424) per share when Musk inked his Twitter deal, but has since fallen by more than 25 per cent to US$709 ($1009) a share.

Ms Zhong said that because Mr Musk used his Tesla shares as collateral to obtain a loan to fund his purchase of Twitter, a fall in the price of those shares is a direct hit to the buyout.

Musk’s vulnerability

“Previously, the margin loan could cover the loan six times. But with the larger decline in Tesla’s share price, it may potentially trigger the covenants of the margin loan,” Ms Zhong explained.

“The banks may sell the Telsa shares pledged as collateral in the deal. This would not only affect Musk’s personal wealth, it will also cause further downward price pressure and stability in Tesla’s share prices.”

Mr Musk can’t just walk away from the deal though – he’s already signed a legally binding agreement and would face a hefty walk-away fee if he decided to pull out without reason.

That’s why analysts are speculating that his fears about robot users on Twitter are a strategy to blow the deal up and tie up any legal challenge from Twitter in the courts, potentially for years.

This might not be Mr Musk’s endgame though; reports have emerged over the past week that the billionaire is attracting third party investors to join his bid, which would reduce his reliance on his Tesla shares to fund a buyout.

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