Elon Musk is right to worry about bot accounts on Twitter, and shareholders should be, too.
“The Twitter deal is temporarily suspended until pending details that support its calculations that spam/fake accounts actually make up less than 5% of users,” Musk said in a Friday morning tweet.
About two hours later, he tweeted, “Still ready to buy.”
In a recent filing, Twitter said that in the first quarter of 2022, less than five percent of its “visible daily active users” had “fake or spam accounts.” Many in the tech community and Wall Street think this is too low, and the real number is much higher. Twitter gave no indication of how it reached the 5% figure, leaving room for doubt. Musk wants to “see receipts,” as they say.
For the sake of argument, let’s assume Twitter is wrong and the actual number of fake accounts is higher. If only a few percentage points are underreported, so seven percent is the true figure, perhaps not so significant. If bots make up a third or even half of daily active Twitter users, this will be crucial.
The legal liability for underestimating boots of this size would be too great. Lawsuits will be filed against advertisers who say they were deceived about how many real people viewed their accounts. Shareholders will sue, claiming that they bought shares at artificially high prices due to Twitter’s misrepresentations. Bondholders can sue, alleging that they have been deceived. Regulators such as the Securities and Exchange Commission and the Federal Trade Commission can sue. While users can successfully sue Twitter, proving that they spend time and money increasing their website’s reach, based on the fact that it’s 30% from spambots that they reach real people, not “readers”.
Mistake bot developers can deal with the fact that they suffer from hiding too many other bots in the app. It may be difficult for a judge to explain why you don’t spend a lot of time botting on Twitter when you know that many other users are bots too.
I do not think it is possible to estimate the potential liability that could arise from a material misstatement of the amount of incorrect information. But because the promises can be so versatile, they’re likely to exceed Twitter’s overall value. They may have exceeded the amount Twitter could afford and had to file for bankruptcy. The bankruptcy of Purdue Pharm in the wake of opioid crimes, which some admit guilty to, is a reminder that deception to the public and customers can be deadly to business.
So why is Musk worried? After all, he wasn’t the one running Twitter during possible distortions. But by taking over the company, he will take responsibility for Twitter’s abuse. More precisely, the responsibilities will continue to belong to Twitter after the purchase. If the damage is high enough, Elon will have to pay tens of billions of dollars for the company, which will then be handed over to the lenders in bankruptcy court or dissolved altogether.
It makes sense for someone to show Musk a loan or stake in the deal. Banks that say they will give credit for the purchase may be concerned about possible liabilities. There may also be some equity partners. No one wants to potentially invest in a legal liability black hole.
Of course, if Musk, his partners or creditors are concerned about potential material misstatements by daily active users, shareholders should also be concerned. If it wasn’t for Musk’s offer, the shares would be less than they were before he got involved. The entire digital media technology industry has fallen out of favor with investors. If Musk backed out of the deal because Twitter’s data had become unreliable, the company’s stock would plummet. Breitbart News also reported earlier this month that Hindenburg Research, which could catch up if Twitter’s shares plummet, recently said the stock could drop 50 percent if Musk closes the deal. That’s before Musk publicly asked about the number of daily users. If Musk leaves for discovering fraudulent numbers, the stock is likely to plummet further.
Twitter futures fell overnight but fell just 8.5% on Friday afternoon. This may reflect the understanding by some investors that a lot of money would be made if Musk continued the deal at the agreed price. If the deal continues as announced, there is the potential for a 30% increase in the current price.
Source: Breitbart
