December 5, 2022

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Twitter is now preparing to sue Musk in Delaware where the company is incorporated. While the outcome is uncertain, both sides are preparing for long court battle.

Musk alleged on Friday that Twitter has failed to provide enough information about the number of fake accounts it has. However, Twitter said last month that it was making available to Musk a “fire hose” of raw data on hundreds of millions of daily tweets when he raised the issue again after announcing that he would buy the social media platform.

Elon Musk attends The Metropolitan Museum of Art’s Costume Institute benefit gala. (Evan Agostini/Invision/AP)

Twitter has said for years in regulatory filings that it believes about 5 per cent of the accounts on the platform are fake but on Monday Musk continued to taunt the company, using Twitter, over what he has described as a lack of data. In addition, Musk is also alleging that Twitter broke the agreement when it fired two top managers and laid off a third of its talent-acquisition team.

Musk agreed to a $US1 billion ($1.48 billion) breakup fee as part of the buyout agreement, though it appears Twitter CEO Parag Agrawal and the company are settling in for a legal fight to force the sale.

“For Twitter this fiasco is a nightmare scenario and will result in an Everest-like uphill climb for Parag & Co. to navigate the myriad challenges ahead around employee turnover/morale, advertising headwinds, investor credibility around the fake account/bot issues, and host of other issues abound,” Wedbush analyst Dan Ives, who follows the company, wrote Monday.

The sell-off in Twitter shares pushed prices close to $34 each, far from the $54.20 that Musk agreed to pay for the company. That suggests, strongly, that Wall Street has serious doubts that the deal will go forward.

While the outcome of any protracted legal battle cannot be known, experts in the legal and business sectors believe Twitter likely has a stronger case.

Morningstar analyst Ali Mogharabi noted that, regarding the spam user count Musk is so focused on, Twitter has “for years explicitly stated in regulatory filings that the ‘below 5 per cent’ spam count may not be accurate given that it is based on a sample and requires a lot of judgment.”

Given current market conditions, Mogharabi said, Twitter may also have a “solid argument that the layoffs and firings of the past weeks represent “an ordinary course of business.”

“Many technology firms have begun to control costs by reducing headcount and/or delaying adding employees,” he said. “The resignations of Twitter employees cannot with certainty be attributed to any change in how Twitter has operated since Musk’s offer was accepted by the board and shareholders.

A sign outside the Twitter headquarters in San Francisco, Monday, April 25, 2022. Elon Musk reached an agreement to buy Twitter for roughly $44 billion on Monday, promising a more lenient touch to policing content on the platform where he promotes his interests, attacks critics and opines on social and economic issues to more than 83 million followers.(AP Photo/Jed Jacobsohn)
A sign outside the Twitter headquarters in San Francisco, Monday, April 25, 2022. Elon Musk reached an agreement to buy Twitter for roughly $44 billion on Monday, promising a more lenient touch to policing content on the platform where he promotes his interests, attacks critics and opines on social and economic issues to more than 83 million followers.(AP Photo/Jed Jacobsohn) (AP)

Tech industry analysts say Musk’s interlude leaves behind a more vulnerable company with demoralised employees.

“With Musk officially walking away from the deal, we think business prospects and stock valuation are in a precarious situation,” wrote CFRA Analyst Angelo Zino. “(Twitter) will now need to go at it as a standalone company and contend with an uncertain advertising market, a damaged employee base, and concerns about the status of fake accounts/strategic direction.”

The uncertainty surrounding who may be at Twitter’s help, Mogharabi said, could also lead advertisers to curtail their spending on the platform.

But “the drama” surrounding the deal, he added, “will also likely attract new users to the platform and increase engagement, especially given the upcoming midterm elections, which could convince advertisers to cut a bit less. In the long run, we think Twitter will remain one of the top five social media platforms for advertisers.”

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