As it now faces the possibility of a protracted legal battle against the richest man in the world to determine control — and perception — of the company, Twitter finds itself in a worst-case scenario, according to one Wall Street analyst.
On Friday, Elon Musk filed a letter with the Securities and Exchange Commission stating his intention to pull out of an agreement made in April to purchase Twitter for $54.20 a share, or about $44 billion.
In response, Twitter said it will sue Musk to force him to consummate the agreement.
Dan Ives, a managing director and senior equity research analyst covering the technology sector at Wedbush Securities, said Twitter's stock price stands to suffer significant damage. Already, Twitter shares were down more than 5% in after-hours trading on Friday to $34.70.
"Monday, this is a $25 stock," Ives said. "The company has been in pure chaos — people have left in droves, and now competitors are going to seize on the ad dollars. With the employee turnover, it’s going to be viewed as damaged goods from another potential buyer."
In his filing, Musk accused Twitter of failing to respond to requests for information about the volume of spam and bot accounts on the platform. Since the acquisition deal was first announced in April, Twitter has maintained that it has cooperated with Musk's requests for information.
On Friday, it did not comment on Musk's specific allegations, saying instead that it will file a lawsuit in a Delaware court to force Musk to follow through with his pledge to buy the company at the agreed upon price.
When Musk and Twitter's board of directors first entered their agreement, the two parties agreed that neither side could walk away from the deal without paying a $1 billion breakup fee.
But payment of such a fee isn't all that's required.
There would need to be a substantial discovery of new information that has a negative impact on the company, known as a "material adverse effect."
One law professor believes Musk's defense, asserting that Twitter was not forthcoming about bots on its website, could prove to be weak.
"He does not bring his 'A'-game to this case," said Eric Talley, a professor at Columbia University Law School. "Everything is turning on disclosure of information about bot accounts, and that that somehow translates into material adverse effects."
Talley said Twitter has consistently for years disclosed information about spam accounts on its platform.
"This is not some crazy thing where we are suddenly discovering a toxic waste dump; this is a known quantity. So it's an odd thing."
Talley said Musk's case could be so weak that a protracted court battle may not occur. He also said the two sides are likely to attempt to come to a settlement that seeks to satisfy both parties.
But Ives, the Wedbush Securities analyst, believes the damage to Twitter's value has only just begun.
"When you have a cult figure like Musk — one of, if not the, most followed person in world — calling out Twitter, now it has a ripple effect that's hard to quantify," Ives said.
"From advertisers to employees to the political firestorm that could ensue," he said. "For Twitter, it’s not about the court battle and the legal ramifications, and how that plays out, that will be debated by lawyers. But it’s a public company that needs to be run, and now it’s hanging in the wind."