Twitter has a unique way of identifying the number of real people on its microblogging platform, referring to them as "monetizeable" daily active users. And they're now a key focus of the $44 billion Elon Musk deal to buy Twitter.
Monetizable users are declared by Twitter to be authentic. That determines how much money advertisers will pay per user. Fake accounts don't count.
Twitter believes 5% of its subscribers exist as automated bots, spammers and fake accounts. As such, they don't count as customers for which advertisers pay. But Musk, the chief executive of Tesla and several other ventures, believes the actual figure stands not at 5%, but 20% or more.
In its first-quarter earnings report, Twitter reported 229 million monetizable daily active users, up 16% from the year-ago period. But if Musk is right, then Twitter's authentic user count would be closer to 195 million.
Overpaid For Elon Musk Twitter Deal
As a result, Musk believes he overpaid for Twitter and wants to renegotiate his offer of $54.20 a share. He also intends to use that disagreement to give him the right to walk away from the deal without having to pay a $1 billion breakup fee.
How might he do that?
Since early May, Musk has demanded that Twitter hand over daily data on all Twitter messages and accounts it has identified as spam and fake. Musk's chief legal counsel reiterated that request in a letter on June 6. Days later, Twitter agreed to the request.
What that means is that Musk will receive a massive stream of more than 500 million tweets posted daily. But deciphering how many are fake will be a challenging job for Musk, just as it is for Twitter.
Twitter Chief Executive Parag Agrawal recently clarified how they identify and handle fake accounts. It's not in the best interest of Twitter to falsify the amount of fake users, he tweeted.
Incentivized To Get Rid Of Spam
"Let me state the obvious," Agrawal wrote in a string of tweets. "Spam harms the experience for real people on Twitter, and therefore can harm our business. As such, we are strongly incentivized to detect and remove as much spam as we possibly can, every single day. Anyone who suggests otherwise is just wrong."
Moreover, spam is inherently hard to detect.
"The most advanced spam campaigns use combinations of coordinated humans plus automation," he said. "They also compromise real accounts, and then use them to advance their campaign. So, they are sophisticated and hard to catch."
Agrawal said Twitter suspends more than a half a million spam accounts every day.
"We also lock millions of accounts each week that we suspect may be spam," he said.
Twitter's plan to release the tweets aims to end a standoff with Musk, who has threatened to pull out of his deal to buy Twitter unless the company provides access to the data.
Both sides agreed to pay a $1 billion breakup fee if they cause the deal to fail. If Musk proves Twitter misled him, he might be able to walk away without paying the $1 billion breakup fee for the deal. But that could get complicated.
Musk Passed On Due Diligence
When he signed the initial deal to buy Twitter in April, Musk waived a right to due diligence. Due diligence looks deeply at the finances and internal workings of a company. This would include looking at Twitter user accounts.
"I'd never advise a client to waive due diligence," said Jimmy Fang, a partner at the corporate practice at Stroock & Stroock & Lavan. "And if the issue of spam and fake users is so important to Musk, why would he waive due diligence?"
There are only a few specific scenarios under which Musk could simply pay the $1 billion termination fee and walk away from the transaction. Twitter could also sue to get him to go through with the original deal.
Musk seemingly made several tactical errors as he maneuvered to buy Twitter, says Fang. They come amid the backdrop of Musk holding the titles of chief executive of Tesla, SpaceX and other multibillion-dollar companies, spreading himself thin.
"It seems very much like he did this as an impulse purchase and is now rethinking his decision," Fang said.
Setting The Stage To Nix Elon Musk Twitter Deal?
Musk and his chief counsel, Mike Ringler, appear to have set the stage to pull out.
A June 6 letter sent to the chief legal counsel at Twitter, Vijaya Gadde, says a failure by Twitter to hand over key data would be a "clear material breach" of the agreement. Hence, Musk reserves the right not to complete the deal, the letter said.
But Musk needs to show the breach had a material impact on the deal's closure, says Fang.
Fang and others think Musk is experiencing buyer's remorse. Musk has committed more than $33 billion of his own wealth, which largely comes from his ownership of Tesla stock, to complete the deal.
Tesla stock has plummeted more than 35% since Musk disclosed his interest in buying Twitter in early April. The drop also comes amid a stock market roiled by a global downturn. Twitter stock is down 20% in the same period.
Wedbush analyst Dan Ives thinks Musk is now looking to walk away from the Twitter deal.
"Our thesis over past few weeks is that the spam/bot issue was going to be the 'material breach' cited by Musk to try to get out of TWTR deal," he wrote in a recent Tweet.
Twitter fell 1.4%, closing at 38.98 on the stock market today. Tesla dropped 3.1% to 696.69.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
