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Oct. 6, 2022, 8:10 a.m. EDT

For Elon Musk, buying Twitter would be the easy part — analysts say the real mess lies ahead

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By Bill Peters

With Tesla Inc. Chief Executive Elon Musk proposing to move forward with his $44 billion offering for Twitter Inc. after months of legal feuding with the social-media platform after he attempted to back out of the deal, Wall Street analysts say the real mess lies ahead.

Barring any other twist ahead of a trial over the deal scheduled for Oct. 17 in Delaware, and Musk’s deposition set for this week, analysts said Wednesday that the merger is effectively done. If the deal wraps, Twitter would be a private company.

But analysts contend that the Tesla /zigman2/quotes/203558040/composite TSLA +7.67% CEO will inherit a company that has been damaged in part by the drama created by his own takeover attempt and that has struggled with advertising and drawing active users at a time when the broader economy and digital ad market are teetering. An executive overhaul and aggressive cutbacks are likely, they say.

“We continue to believe Musk saw the writing on the wall and knew his chances of a victory in Delaware were slim to none with the best path accepting the current deal and move forward,” Wedbush analyst Daniel Ives said in a note on Tuesday.

“For Musk, the irony is the easy part of this deal was buying Twitter, the hard part will be fixing it with monetization and subscriber engagement, a Rubik’s Cube problem for Twitter over the past decade,” he continued.

Opinion: Twitter stood up to Elon Musk and won, but will it feel like a win once he owns it?

Musk has said he wants to bring Twitter back as a publicly traded company in three years. He’s floated the idea of reformatting Twitter with a subscription model. And on Tuesday , he tweeted that buying Twitter is an “accelerant to creating X, the everything app.”

Twitter stock slipped 2.3% to $53.81 on Wednesday, after surging 22% a day earlier on the news that Musk had suggested proceeding with the deal.

Whatever Twitter becomes, there are questions about whether a format overhaul —one that users could have to pay more for — will work, and concerns about whether Musk’s handling of the company will facilitate the spread of misinformation and online harassment. Steep costs cuts are likely regardless, analysts say.

“We believe this is likely to take a few years to fix, not a few quarters,” Truist analyst Youssef Squali said in a research note on Tuesday.

However, he added: “But in a private setting, (Musk) should be able to restructure the business and get it back on an attractive growth / margin trajectory before potentially bringing it back to the public markets.”

Stifel analyst Mark Kelley also noted that since Musk’s deal to buy Twitter was announced, the company had seen “a steady drumbeat of departures across the ranks” with a “product that has been in limbo.”

“As such, utilizing the underlying technology as a means to create a ‘new’ platform is a must, in our view,” he continued in a note on Tuesday.

Read: Is now a good time to buy Twitter stock? Financial advisers express caution, as Elon Musk finally goes ahead with his $44 billion offer.

MKM Partners analyst Rohit Kulkarni noted that Twitter Blue, a monthly $2.99 subscription service offered by the company, offers quicker navigation and allows users to retract tweets before others can see them, among other features. But he also wrote in a Wednesday note that a bigger move toward subscriptions “could lead to ad dollars driving toward other smaller players like Pinterest /zigman2/quotes/211319641/composite PINS +5.92% and Snap /zigman2/quotes/205087158/composite SNAP +4.99% .”

On Monday, Musk’s lawyers sent a letter to Twitter indicating that he was proposing to move forward with the acquisition on its original terms, provided receipt of debt financing and a stay of Twitter’s lawsuit to complete the deal, filed in Delaware Chancery Court this summer. Twitter said it planned to close on the transaction at $54.20 per share — the original per-share price announced in April.

Not long after the deal was announced in April, Musk began questioning Twitter’s grip on its fake accounts. And in July, he told Twitter he wished to terminate the deal, accusing it of misleading him on the presence of those accounts. Twitter sued shortly after.

For more: Elon Musk’s legal battle with Twitter may be over, but his war with the SEC continues

Kelley, at Stifel, said Musk’s decision to move ahead with the deal’s original terms came as a surprise.

“We find it hard to believe that Musk is more comfortable with the growing list of concerns he highlighted as a means to back away from the proposed transaction (bots, spam, security concerns),” Kelley said, “and we believe he had come to the realization that he would likely be forced to proceed in the end (why waste incremental cash on legal fees at trial?).”

But Squali said the decision was likely reflected slim victory prospects.

“We believe this decision is likely driven by Mr. Musk and his team coming to the realization that their case had a very low probability of success given their decision early on to wave any due diligence,” Squali said.

Twitter stock is up around 20% this year, thanks in large part to Tuesday’s jump. By comparison, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +3.09% has tumbled 21% year-to-date.

Keep reading: Elon Musk would lose 13.5 million Twitter followers if he scraps most spam accounts, data finds

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