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The Ratings Game: Twitter stock downgraded as whistleblower adds ‘meaningful uncertainties’ to Musk deal odds

A whistleblower’s claims that Twitter Inc. had lax security practices have added enough complexity to the social-media company’s Elon Musk takeover saga that an analyst is caving on his once-bullish stance.

Rosenblatt Securities analyst Barton Crockett downgraded Twitter

shares to neutral from buy Wednesday, writing that he sees “meaningful uncertainties” when thinking about the chances that the deal goes through under the original terms.

Peiter “Mudge” Zatko, Twitter’s former head of security, issued comments to Congress in July saying that Twitter ran some servers on vulnerable software and that its executives lacked incentives to suppress spam activity. CNN and The Washington Post published documents and reports related to his commentary Tuesday.

Twitter said that Zatko was fired for performance and that his statements were “riddled with inconsistencies and inaccuracies.”

The disclosures come as Tesla chief Musk aims to back out of his $44 billion deal for Twitter, citing concerns that the company was untruthful in its public disclosures about the extent of bot activity on the platform. A Delaware judge is expected to decide on the matter in October.

See also: Twitter had recent correspondence with the SEC over user-count methodology

The Zatko information “appears to open up a new avenue for Musk to allege materially inaccurate representations by Twitter, allowing Musk to move on from a fishing expedition on well-hedged spam disclosures,” Rosenblatt’s Crockett wrote. “Musk instead may be able to use the whistleblower’s claims to argue that security malpractice constitutes a material adverse effect.”

One problem for Twitter is that the whistleblower comments “could be portrayed as fitting a pattern.” Twitter settled a complaint with the Federal Trade Commission in 2011 surrounding the privacy of personal information, and it has run into other security-related issues in the past, including in 2020 when a teenager gained access to various verified accounts.

Earlier this year the FTC ordered Twitter to pay a $150 million FTC fine, saying that the company used security information for advertising purposes.

“The risk is that Musk could use this to drag out his lawsuit, or get out of the deal,” Crockett wrote. “Twitter needs speedy resolution, as its business suffers as this continues.”

While a judge had scheduled a one-week trial for October, Crockett sees a chance that the judge “could extend the timeline to explore the whistleblower claim” or that Musk “might be able to argue that violating an FTC Consent Decree is a material adverse effect.”

Crockett’s new $37 price target on Twitter’s stock reflects his “base case” that Musk and the company ultimately reach a “bigger compromise” on the deal.

“Twitter won’t want this to drag on, or risk losing everything,” he wrote. “Musk might be willing to move ahead if he gets a big concession.”

The $37 price target is the midpoint of Musk’s $54.20 initial takeover price and $20, or 3.2 times estimated 2022 revenue for Twitter.

“Twitter could trade at this price absent a deal, consistent with multiples for peers Pinterest

and Meta
” Crockett continued.

Shares of Twitter lost 7.3% in Tuesday’s session following the reports on Zatko’s claims, though they were gaining back ground Wednesday and up 1.8% as of mid-afternoon.

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