Elon Musk ditching the deal could affect Twitter advertisers too

It's the end of a dream for Musk, a nightmare for Twitter. But should the advertisers be concerned about the fake accounts?

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Joseph P Chacko
Joseph P Chacko
Joseph P. Chacko is the publisher of Frontier India. He holds an M.B.A in International Business. Books: Author: Foxtrot to Arihant: The Story of Indian Navy's Submarine Arm; Co Author : Warring Navies - India and Pakistan. *views are Personal

In a note published by the American stock market watchdog Securities and Exchange Commission (SEC), Elon Musk’s lawyers said that Twitter has not adhered to its commitments made in the agreement, in particular by not providing all the requested information on the number of inauthentic accounts and spam.

According to the letter sent by a lawyer for the billionaire to the company’s legal department, of which the SEC received a copy, “Twitter failed to comply with its contractual obligations” and did not provide the “required business information.” “Sometimes Twitter has ignored Musk’s requests, sometimes rejected them for reasons that seem unjustified to us, and on other occasions, it has provided incomplete or unusable information,” it says.

Twitter, on multiple occasions, said in recent weeks that the fake accounts on its platform are less than 5%. Musk and his team believe that the network is lying and that this affects the viability of his business and, therefore, the company’s value.

For weeks, experts have wondered if Musk was contemplating withdrawing his proposal or hammering out a lower price.

By the cessation of his commitment to buy Twitter, the businessman has exposed himself to substantial legal proceedings, which the social media has already announced to initiate. Both parties had pledged to pay severance pay of up to $1 billion in certain circumstances.  

The chairman of the platform’s board of directors, Bret Taylor, has also tweeted that it was “determined to conclude the transaction at a price and on the terms agreed” and intended to prevail in court.

The Spam account issue

Twitter’s true monetizable daily active users (mDAU) count is a key revenue component of the company’s business, as approximately 90% of the microblogging site’s revenue comes from advertisements. Musk’s team believes that Twitter has underrepresented the number, which may constitute a Company Material Adverse Effect on the Merger Agreement. Twitter’s recent declining financial performance and revised outlook is also a factor Musk considered the basis for terminating the Merger Agreement.

Musk’s SEC filing states Twitter had initially refused to reveal the methodology to calculate spam accounts, and then it provided APIs (Application Programming Interface) with restrictions.

Twitter non-transparency should affect advertisers, as it affects the quality of their spending. Twitter earned $5.1 billion in advertising revenue in 2021, which could grow to $9.6 billion by 2026.

Twitter in crisis

mDAU apart advertisers should also be worried about the falling business prospect of the company. Twitter fired 30% of the dedicated recruiting team two months after hiring freezes across the company; a spokesperson for the social network told Techcrunch, refusing to share the exact number of affected employees. 

According to the Washington Post, the platform’s situation is not at its best. Twitter has suspended most of its hiring and re-entry for months, aside from the most critical roles. This is just the umpteenth difficulty that affects the web giants, so much so that it is estimated that over 30,000 workers in the sector have been laid off in the last two months, with social networks not immune to the market crisis. 

Competitors such as Meta-Facebook and Snap have taken precautionary measures to cope with the situation. Last week, Mark Zuckerberg, CEO of Meta, told employees the need to prepare for more resource-intensive months with more work and with fewer staff. 

In the letter, Elon Musk’s lawyers also mentioned the recent layoffs of Twitter employees and the hiring freeze. The lawers have listed as many reasons as possible to avoid having to pay the fine $ 1 billion fine.

As per the SEC filing, Musk’s team wrote that three executives have resigned since the Merger Agreement with Twitter was signed. The Vice President of Twitter Service, the Head of Data Science, and a Vice President of Product Management for Health, Conversation, and Growth had resigned. The company has not received Parent (may be referring to Odeo, Ed) approval for changes in the business conduct, which includes incidents like resignations and others listed in the letter to the SEC. 

As per the SEC filing, Twitter was obliged to get consent and preserve the functioning material components of its business organization substantially. 

Elon Musk’s Twitter buy attempt

On April 25, Elon Musk won his bet, despite initial attempts by Twitter to push him away.  

On April 23, Elon Musk said that he wanted to buy the microblogging platform Twitter, a digital town square, to create maximum trust in society around the world and gives everyone the right to speak. 

After gradually and discreetly increasing his share capital of the group, Musk offered a definitive agreement with the CA of Twitter to buy it at a price of 54.20 dollars per share, which amounts to a total of 44 billion dollars.

Since then, Twitter has lost more than a quarter of its value. The stocks of Musk’s electric car venture Tesla too, tumbled nearly 25% over the same time.


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