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Hawks and squawks

23 Sep 2016 By Robert Cyran

Tech vultures are circling a broken-winged Twitter. Alphabet, Salesforce.com and others may want to buy the $16 billion micro-blogging network, according to CNBC. Slowing revenue and user growth, along with a lack of direction, make a sale a good option. The rationale for an acquirer is less clear, but cash and hubris could prevail over financial logic.

The once high-flying Twitter is struggling to gain altitude. It counts 313 million monthly active users, but growth has slowed to 3 percent annually. Moreover, the company led by Jack Dorsey is finding it harder to generate more money. Revenue increased 20 percent in the second quarter. Twitter was growing three times faster a year ago.

Twitter may have broader appeal to certain suitors. Mashing Google’s services more tightly with Twitter’s, for example, might provide a better window into users and real-time events. Facebook has greater sway with advertisers, notwithstanding the embarrassing video-measurement blunder it disclosed on Friday, and therefore probably could squeeze more revenue from each Twitter user.

Verizon’s confounding strategy of acquiring troubled internet firms means it can’t be counted out either. Twitter’s tumultuous history could give many buyers the idea they could do better managing it. Having a full-time chief executive would be one good step. Dorsey moonlights as the boss of payments startup Square.

Justifying an acquisition on financial grounds would be tough for most buyers, however. Twitter lost $107 million last quarter. Perhaps R&D and marketing spending, which tallied $415 million last quarter, could be slashed. Halving the figure might translate into a $400 million annual profit.

Even so, assume a 50 percent premium to Twitter’s market capitalization – the same rate over the undisturbed share price that Microsoft recently agreed to pay for LinkedIn – and the purchase price would be $19 billion. That would mean a valuation, after factoring in the dramatic investment cuts, of nearly 50 times earnings.

The abundance of capital in Silicon Valley could be feeding Twitter takeover considerations, too. Alphabet, Facebook and Salesforce all could easily afford the acquisition. They may even compete to keep each other from owning the company. For all the possible reasons to buy Twitter, though, the economic ones just don’t fly.


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