TheChek News Flow

A settlement would beat a protracted legal battle for both sides, but the social network will still have to contend with the aftermath

Elon Musk wants to leave Twitter TWTR -5.10% at the altar, having mistaken lust for love. Walking away will still cost him, but it is a better outcome for both sides. The question for Twitter’s shareholders is how much worse off it will be than before its brief dalliance with the famous billionaire.

In a filing Friday, Mr. Musk’s lawyers declared his intention to terminate the merger agreement he signed in April with the social-media platform. His claim is that Twitter breached their deal by failing to provide Mr. Musk with requested information to settle questions about bots and an allegedly inflated user count. Mr. Musk, through his lawyer, is also accusing the social network of “materially inaccurate representations,” and added for good measure his belief that the portion of spam and fake accounts in Twitter’s user base is “wildly higher” than the less-than-5% figure Twitter has historically claimed in its regulatory filings.

Twitter says it is planning a lawsuit to compel Mr. Musk to honor the agreement. In a strict legal sense, the social network might have the upper hand: Mr. Musk waived his due diligence rights in signing the deal, and the objections he raised came conveniently after electric-vehicle maker Tesla lost about one-third of its market value, thus denting the very net worth Mr. Musk was leveraging to finance the Twitter acquisition.

But a protracted legal battle isn’t in either side’s interest. Mr. Musk could be forced to write a big check years from now for the husk of a social-media company he once coveted. Or Twitter’s shareholders could walk away with a mere $1 billion consolation prize in that parlous state.

True, a settlement even significantly north of the $1 billion breakup fee agreed to in the merger won’t go far to erase the $14.7 billion difference between the $54.20 per-share deal price and the $35 that Twitter’s shares hit after-hours on Friday following Mr. Musk’s termination filing. Indeed, Twitter’s shares would likely be far lower even if the stock simply tracked the damage done to its social-network peers over the past three months, as concerns about the health of online advertising in a highly inflationary environment were affirmed by a warning from Snapchat parent Snap Inc. in late May. A drop in line with the Nasdaq CTA Internet Index would put Twitter’s shares slightly below the $30 mark now.

And, unfortunately, that is a base-case scenario that assumes Twitter emerges from the Musk melee unscathed. That appears unlikely. If Mr. Musk’s initial interest made Twitter seem like an undervalued darling, the problems he has both raised and arguably caused over the past few months could change a lot of minds.

One thing clear long before Mr. Musk raised his concerns is that it is impossible to know just how many “real” users Twitter’s platform has. Certainly it isn’t a problem unique to Twitter; all social-media platforms disclose their “best estimates” of their respective user bases, noting they are likely inaccurate to some degree. Meta Platforms, for example, recently disclosed in a filing that around 11% of monthly active users for its Facebook app could be duplicate accounts. Twitter has already said publicly that it misstated its users for 12 consecutive quarters through the end of last year, giving itself credit for multiple accounts being owned by a single user.

But Mr. Musk has one of the world’s loudest megaphones as one of only a handful of Twitter accounts with more than 100 million followers. That gives his public questioning of the integrity of the platform extra weight.

And even he seems to have overestimated Twitter’s external appeal. An analysis published by Pew Research last month showed nine in 10 journalists use Twitter for their jobs, but just 13% of American adults say they regularly get news on Twitter. That is nearly the same percentage who report getting their news from Instagram and significantly less than the 31% who said they get their news from Facebook.

Perhaps most concerning is what the past few months have done to Twitter’s management and talent base. As Mr. Musk’s own lawyers point out in Friday’s letter, three key executives have resigned from Twitter since the merger was announced. It is possible those departures were spurred by the prospect of the merger, especially after Mr. Musk showed a propensity to publicly criticize Twitter employees and made clear that, regardless of his title, things would be run his way or the highway. But the damage is still done, and Twitter under the glare of the new spotlight with or without the deal might remain an unappealing place to work.

At the end of the day, Mr. Musk’s case is all about “material adverse effects”—the user numbers, the bots, the management. But for Twitter’s investors, the Musk affair may prove to have the worst effects of all.