Twitter dominates headlines, but will its finances match its notoriety?

If Twitter’s share price matched the number of headlines it generated, it would be one of the most valuable companies on earth. In reality its shares, which sit at a little under $US39, have not even been able to match the $US54.20 price that billionaire Elon Musk agreed to pay for them back in April.

Earlier this month, Musk declared he was terminating the deal, accusing the company of hiding the true number of spam accounts on its platform, which claims 229 million monetisable daily active users. In fiery legal filings, Twitter rejected that and characterised the dispute as a simple case of buyer’s remorse.

Twitter chief executive Parag Agrawal (left) is managing a company through the turbulence of a purchase by Elon Musk (right) that was welcomed by co-founder Jack Dorsey (centre).Credit: Jamie Brown

The pained acquisition deal has been a microcosm of much of Twitter’s history: full of drama but doing nothing to aid the company’s bottom line.

How it started: Twitter grew out of a now-defunct podcasting company called Odeo in 2006.

Like many other things about the company, exactly who co-founded it has been controversial, but it is widely accepted that the key people were Evan Williams, a serial entrepreneur who founded the seminal internet publishing platforms Blogger and Medium; Christopher “Biz” Stone; Jack Dorsey; and Noah Glass.

The company enjoyed a quick rise typical of the best technology firms, and went public in late 2013 with a market capitalisation of about $US23 billion after a day of trading.

How it’s going: Having played a major role in a string of revolutions throughout the Arab world and the rise of a pugnacious New York reality TV star to the US presidency, Twitter is basically back where it started. Its market capitalisation this week was $US28.8 billion, despite a decade worth of inflation.

Industry: Social media.

Main products: Short-form text and multimedia posts, online newsletters, audio chat rooms, advertising.

Key figures: Chief executive Parag Agrawal; board chair and Salesforce co-chief executive Bret Taylor; the sometime world’s richest man, serial entrepreneur and potential Twitter purchaser Elon Musk; co-founder and former board member, Jack Dorsey, who is seen by some as championing Musk’s bid.

The bull case: Valuing Twitter is unlike almost any other company.

Technology stocks have been thrashed recently, so Twitter’s likelihood of punching above $US50 a share in the short term is likely dependent on one thing: the Delaware Court of Chancery. It will rule on Twitter’s demand for Musk to complete his $US44 billion purchase of the company.

The company’s argument is that it has fulfilled every reasonable request from Musk to provide data on spam accounts, been honest with regulators and the public and now faces a petulant billionaire unhappy with his decision to buy the company.

“Having mounted a public spectacle to put Twitter in play, and having proposed and then signed a seller-friendly merger agreement, Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away,” Twitter said in a legal filing.

Forager Funds Management chief investment officer Steve Johnson, who holds a position in Twitter, is downcast about its performance but sees the social media company as holding the upper hand in litigation.

“On our reading of both sides of the argument here it seems to us legally very, very clear that [Musk] doesn’t have a leg to stand on,” Johnson says.

He points to previous takeover battles such as the luxury goods conglomerate LVMH’s takeover of jewellery brand Tiffany in 2020. LVMH initially tried to get out of the deal but ultimately agreed to complete its purchase for a marginally cheaper price as litigation in Delaware progressed.

Some form of settlement like that is the most likely outcome for Twitter, in Johnson’s view, though he says it would have to be a “very big number” because the gap between Musk’s agreed price per share and Twitter’s current price of about $US39 per share is substantial.

The bear case: Johnson is clear-eyed about the bear thesis, too. “The share price will fall a lot if this deal doesn’t happen,” he says.

Musk argues that the social media company’s process for assessing spam bots is comically lacking, undermining a key figure for advertisers and its public pronouncements, and breaching the sale agreement.

“In a May 6 meeting with Twitter executives, Musk was flabbergasted to learn just how meager Twitter’s process was,” his lawyers told the court. “Human reviewers randomly sampled 100 accounts per day (less than 0.00005 per cent of daily users) and applied unidentified standards to somehow conclude every quarter for nearly three years that fewer than 5 per cent of Twitter users were false or spam. That’s it. No automation, no AI, no machine learning.”

And there is another dynamic at play: the longer the dispute drags out – and Musk does not want a trial before February next year – the more it will be a distraction for Twitter that may prompt its leaders to settle for a cut-price rate. That could be the $US1 billion break fee specified in the agreement, which would leave the company wrestling with its perennial challenge of how to convert its cultural influence into cash.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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