Is Twit­ter an ac­qui­si­tion tar­get?

Financial Mirror (Cyprus) - - FRONT PAGE -

The past few months haven’t ex­actly been easy for Twit­ter’s CEO Jack Dorsey. Ever since he took back the reigns at the com­pany he co-founded in 2006, he has had to let more than 300 em­ploy­ees go, see sev­eral top ex­ec­u­tives leave and wit­ness his com­pany’s stock price crum­ble to new lows.

Since the day Dorsey was named per­ma­nent CEO of the so­cial me­dia com­pany in Oc­to­ber 2015, Twit­ter’s stock price dropped by 40%, shav­ing more than $6.5 bln off the com­pany’s val­u­a­tion. Twit­ter’s mar­ket cap cur­rently stands at $11.5 bln, down from al­most $40 bln at its peak in De­cem­ber 2013.

Twit­ter’s low val­u­a­tion has made the com­pany a sub­ject of ac­qui­si­tion ru­mours. Af­ter News Cor­po­ra­tion had dis­missed takeover ru­mours ear­lier this year, an­other ru­mour sur­round­ing Twit­ter’s pos­si­ble ac­qui­si­tion by a group of in­vestors sur­round­ing ven­ture cap­i­tal­ist Marc An­dreessen sur­faced on Mon­day. Twit­ter’s stock price was up al­most 10% in early trad­ing, stabilising to a 8% gain by af­ter­noon at $18.12 as Wall Street ap­pears to like the idea of Sil­i­con Val­ley in­vestor An­dreessen and his and firm Sil­ver Lake Part­ners get­ting in­volved.

Ac­cord­ing to The In­for­ma­tion, sev­eral in­vestors in Sil­i­con Val­ley are pulling to­gether plans to buy or re­struc­ture the com­pany. Talk of a po­ten­tial ac­qui­si­tion fol­lows up­heaval in its man­age­ment ranks, with sev­eral ex­ec­u­tives in­clud­ing the heads of prod­uct and en­gi­neer­ing leav­ing Twit­ter, Dorsey con­firmed last month.

USA To­day re­ported that the com­pany is also ex­pected to un­veil new board mem­bers when it re­ports quar­terly earn­ings next week. Once again, the big ques­tion for in­vestors is how quickly is Twit­ter adding monthly ac­tive users. Last quar­ter, Twit­ter missed Wall Street force­casts with 307 mln monthly ac­tive users.

Look­ing back, a glitch in­volv­ing one of the un­der­writ­ers of Face­book’s em­bar­rass­ing ini­tial pub­lic of­fer­ing (IPO) back in May 2012 and the near im­me­di­ate fall below IPO price, even Mark Cuban said he got burned on his in­vest­ment and had to sell at a loss one month af­ter buy­ing the IPO.

Then re­al­ity set in, and three and a half years later shares are push­ing $112 and a $360 bln val­u­a­tion, nearly 200% higher since the in­fa­mous IPO flub, ac­cord­ing to 24/7 Wall Those who have stayed away from Face­book th­ese past three years plus can vent, and those who were squeezed out at the lows along with Cuban can only weep now. The im­por­tant ques­tion how­ever is what can we learn from an in­vest­ment per­spec­tive from the case of Face­book? Will such a rise also hap­pen with Twit­ter Inc?

One could ar­gue that Twit­ter’s cur­rent flops are sim­i­lar to what Face­book al­ready ex­pe­ri­enced in 2012 and 2013, when ma­jor ad cam­paigns were pulled at the last minute, em­bar­rass­ing the com­pany. Only weeks be­fore the Face­book IPO, Gen­eral Mo­tors can­celled a $10 mln ad cam­paign over ads not be­ing flashy enough. That also con­trib­uted to the IPO flub. One year later, in May 2013, both Nis­san and Na­tion­wide pulled ad cam­paigns be­cause their ads were show­ing along­side of­fen­sive posts.

May 2013 was the last time Face­book shares were avail­able in the $25 range. So per­haps the same is in store for Twit­ter? It doesn’t seem so, ac­cord­ing to 24/7 Wall While Face­book’s mis­takes early on were rookie faux pas that was cor­rectable, Twit­ter’s mis­takes since its own IPO are more fun­da­men­tal to the na­ture of the com­pany it­self. GM’s in­fa­mous can­cel­la­tion on the eve of the Face­book IPO was ar­guably GM’s own mis­take. Face­book stuck to its ad for­mat and didn’t change it just to suit GM. As for the Nis­san and Na­tion­wide fi­asco one year later, Face­book has since fig­ured out how to pro­tect its ad­ver­tis­ers from be­ing jux­ta­posed to of­fen­sive con­tent.

As for Twit­ter, its de­cline is not an is­sue of some glitch or flub or em­bar­rass­ing in­ci­dent with its ad­ver­tis­ers. Its big­gest prob­lem is that its per user value is so much lower than Face­book’s and does not seem to be climb­ing much. Twit­ter has 320 mln monthly ac­tive users as of its last fil­ing. Di­vide that by last quar­ter’s rev­enue and you get $1.78 per user. Keep in mind that th­ese num­bers al­ready at­tempt to fil­ter out spam ac­counts.

Granted, Face­book’s user base is much big­ger, but the real is­sue is that its av­er­age rev­enue per user is nearly $12, al­most seven times Twit­ter’s. The rea­son is that Face­book con­nects tight so­cial cir­cles of peo­ple who tend to stay on the site longer to talk (or yell) at each other. This al­lows for bet­ter tar­get­ing and in­creases the chances that ads will be clicked on and ef­fec­tive. Twit­ter users on the other hand are not nec­es­sar­ily so­cially con­nected to one an­other, so the site func­tions more like mi­cro news with users flip­ping in and out quickly. This dam­ages per-user rev­enue and is less con­ducive to tar­geted ad­ver­tise­ments.

Even back in 2012 when Face­book was floun­der­ing, its av­er­age rev­enue per user was $5.32, still three times higher than what Twit­ter’s is now. That num­ber more than any­thing is the big­gest rea­son Twit­ter now does not look like Face­book in 2013.

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