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Elon Musk Thinks of Buying Twitter at a Lower Price

The billionaire has launched a public campaign designed to force Twitter's board of directors to renegotiate the price.
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Will Elon Musk end up getting what he wants from Twitter  (TWTR) - Get Twitter Inc. Report

The richest man in the world thinks he will. 

A few days after launching a public campaign to force the management and the Board of Directors of the micro-blogging website to agree to renegotiate the acquisition price it had proposed on April 14, Musk thinks he has achieved his goal. 

The CEO of Tesla  (TSLA) - Get Tesla Inc. Report has just indicated that he believes a Twitter deal at a lower was not “out of the question."

The billionaire made the comment at a summit hosted by investors Chamath Palihapitiya, Jason Calacanis, David Sacks and David Friedberg for their “All-In” podcast.

The serial entrepreneur's comments caused Twitter stock to fall at the close. Twitter shares ended down 8.18% at $37.39. At this level, the stock has erased all the gains acquired since April 4, the date on which Musk had announced to hold a stake of 9.2% in Twitter. 

Are Fake Accounts an Excuse to Lower the Price?

Twitter stock ended April 1, the last trading session before Musk's announcement, at $39.31. It had risen to $49.97 the day of the announcement but had never gone up to $54.20, the price per Twitter share offered by the mogul. Musk had made an offer of $44 billion to acquire the entire company on April 14. After putting in place a poison pill to make any takeover of the group difficult, Twitter's Board of Directors ended up accepting Musk's proposal.

But since the context has changed. To obtain financing for the transaction, Musk, who has no liquid assets, had to obtain bank loans but also a $12.5 billion margin loan secured by Tesla shares. He recently succeeded in reducing this margin loan thanks to $7.1 billion in preferred-equity commitments from a group of investors including Oracle  (ORCL) - Get Oracle Corporation Report Founder Larry Ellison, Sequoia Capital, Qatar Holding and Saudi Prince Al Waleed bin Talal Al Saud, a current Twitter shareholder.

Musk has also secured another $1 billion equity commitment, recently two sources told TheStreet on condition of anonymity. The billionaire and his advisers are currently in discussions to obtain other equity commitments, which together with the preferred financing would make it possible to curb the margin loan and thereby eliminate any financial risk for Musk and his lenders.

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Moreover, fears of recession have intensified, causing a real rout in the financial markets. The losses are particularly colossal for tech groups, behemoths like startups. This new landscape has led some pundits to say that Musk is likely to try to renegotiate the price to acquire Twitter. What the billionaire somewhat confirmed last week by declaring the operation on hold pending an investigation into the number of fake and spam accounts on the platform.

"Twitter deal temporarily on hold pending details supporting calculation that spam/fake accounts do indeed represent less than 5% of users," Musk said on May 13.

'The Twitter Board Is Caught in a Quagmire'

Many experts see Musk's decision as a tactic to try to obtain a low price or simply abandon the operation.

"The bot issue [is] not a new issue and likely more of a scapegoat to push for a lower price," said Wedbush analysts Dan Ives and John Katsingris in a recent note to clients. "The stark reality for Twitter is that no other strategic/ financial bidder will come near this deal and Musk knows that."

"The elephant in the room for the Twitter board is Musk can walk away for a $1 billion as a small breakup fee (for Musk-all relative) and likely cite the bot/fake account issue as the reason, even though this likely would be contested by Twitter in the courts."

Ives and Katsingris believe that:

"If a revised deal does get done by Musk and Twitter, it will likely will be at a lower price once negotiations take over and the diligence happens around Twitter DAU and algorithms hot button issues."

"The Twitter Board is caught in a quagmire as if they do not accept a lower price (after negotiations following the bot issue scrutiny over the coming weeks) for the deal and Musk does actually walk then the stock would likely see a sub $30 level with a broken deal in this shaky market backdrop," the analysts say.

Musk, who asked his millions of Twitter followers to help him in his fight against fake Twitter accounts, said he'd revealed Twitter's methodology in calculating the number of potential spam accounts or 'bots' when replying to one of his 93.4 million followers.

"Our actual internal estimates for the last four quarters were all well under 5% – based on the methodology outlined above," Parag Agrawal, Twitter's CEO responded on May 16. "The error margins on our estimates give us confidence in our public statements each quarter."