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For the birds

6 Oct 2016 By Jeffrey Goldfarb

Twitter’s openness to being sold has incited a tweetstorm with a direct message: It will be hard for a new owner to make buying the $15 billion social network stack up.

The company led by Jack Dorsey wants offers before the end of the month. Suitors are falling away, however, after some initially showed interest, according to media reports. Alphabet’s Google, Walt Disney and Apple probably won’t bid, says tech news site Recode.

All the buzz has roiled investors. Twitter shares soared as much as 35 percent in the days after a Sept. 23 report on CNBC that it was moving closer to a sale. They tumbled 20 percent on Thursday after the news broke that Google and others had lost interest.

In the meantime, the stock of Salesforce.com has fallen more than 5 percent in a day on two occasions after being linked to the auction – and rebounded again after remarks by Chief Executive Marc Benioff suggested he might not be that keen. The $50 billion business-software maker is short on cash and investors probably aren’t enamored of being diluted for Twitter. More generally, though, there’s no way conventional financial analysis can help any company rationalize an acquisition of the purveyor of 140-character messages.

Twitter is expected to lose about $270 million next year. Add back around $100 million of interest, then cut in half the roughly $1.7 billion of R&D and marketing costs, as a buyer might do. Twitter’s operating profit would then be approximately $700 million. According to Morningstar, Twitter’s weighted average cost of capital is roughly 9 percent. To generate an equivalent return on investment, even generously assuming a zero tax rate, would mean paying no more than $7.7 billion for the company, about half its current market value.

Silicon Valley often prefers its own oddball math. Twitter may look cheap next to what Microsoft is paying for LinkedIn if the chosen metric is price per monthly active user. Or a company like Alphabet might think it can wring more value from Twitter’s ample data. The topic that seems to be trending, though, is that it’ll be hard for anyone to justify buying Twitter.


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