With­out part­ners, Twit­ter faces tough choices

Kuwait Times - - ANALYSIS -

The ap­par­ent lack of in­ter­est in Twit­ter Inc by po­ten­tial suit­ors may force the so­cial me­dia com­pany to con­sider a route anath­ema to as­pir­ing tech star­tups: A ma­jor re­struc­tur­ing and cut­ting some its nearly 4,000 em­ploy­ees. The pop­u­lar but money-los­ing mi­cro-blog­ging ser­vice spent ag­gres­sively on prod­uct de­vel­op­ment and mar­ket­ing in re­cent years, bet­ting that it could af­ford to post losses as long as it at­tracted new users.

But that growth stalled this year af­ter it ex­ceeded 300 mil­lion ac­tive monthly users, less than a fifth of Face­book Inc’s users and be­low Face­book’s In­sta­gram. Ear­lier this month, Twit­ter hired bankers to ex­plore sell­ing it­self. Tech­nol­ogy and me­dia com­pa­nies in­clud­ing Sales­force.com Inc, Walt Dis­ney Co and Al­pha­bet Inc’s Google looked at the com­pany but ul­ti­mately passed on buy­ing it. The aborted sales process - and the com­pany’s strat­egy as an in­de­pen­dent com­pany - will be back in the spot­light when Twit­ter re­ports earn­ings on Oct 27. The com­pany de­clined to comment.

“It’s go­ing to take some bold moves here,” said David Hsu, a man­age­ment pro­fes­sor at the University of Penn­syl­va­nia’s Whar­ton School, sug­gest­ing job cuts may be an op­tion. “It takes a very lean staff to main­tain the core Twit­ter as an ad­ver­tis­ing and mes­sag­ing plat­form,” Hsu said. Ac­cord­ing to SunTrust an­a­lyst Robert Peck, Twit­ter could cut 10 per­cent of its work­force and save about $100 mil­lion a year. Ma­jor lay­offs, though, could hurt the com­pany’s image in San Fran­cisco, where the com­pe­ti­tion for en­gi­neer­ing tal­ent is fierce.

Big Spender

The com­pany may look first at cut­ting sales and mar­ket­ing, an area in which it is spends more than twice as much as its ri­vals to earn each dol­lar of rev­enue. “Twit­ter’s cost struc­ture was orig­i­nally built to grow into a much larger user base,” said Peck. “But with user growth stag­nat­ing, the com­pany likely needs to re­duce ex­cess costs.”

In the first six months of this year, Twit­ter’s sales and mar­ket­ing spend­ing to­taled $473 mil­lion, or about 40 per­cent of its rev­enue. By com­par­i­son, spend­ing in that area ac­counted for 19 per­cent of rev­enue at Ya­hoo, 15 per­cent at Face­book, and 12 per­cent at Google-par­ent Al­pha­bet, ac­cord­ing to a Reuters anal­y­sis of quar­terly fi­nan­cial re­ports.

Twit­ter also spends more, pro­por­tion­ately, than its peers on re­search and de­vel­op­ment. First-half spend­ing on R&D ac­counted for $334 mil­lion, or 28 per­cent of rev­enue, com­pared to 24 per­cent at Face­book, 23 per­cent at Ya­hoo and 16 per­cent at Al­pha­bet, ac­cord­ing to a Reuters anal­y­sis. Twit­ter could also re­duce ex­penses by cut­ting prod­ucts and mov­ing some en­gi­neer­ing po­si­tions to lower-cost over­seas lo­ca­tions, an­a­lysts said.

It may also need to re­form its stock-based com­pen­sa­tion plans when it hires new em­ploy­ees. Twit­ter doled out $682 mil­lion in stock-based com­pen­sa­tion last year, a large por­tion of its roughly $2 bil­lion in an­nual rev­enue, which weighs on its prof­itabil­ity. Pri­vate eq­uity firms that ex­am­ined a buy­out of Twit­ter last year were turned off by the amount of eq­uity-based com­pen­sa­tion that would have to be paid out to em­ploy­ees in a deal, ac­cord­ing to sources at the time.

Ac­tivist in the Wings?

If Twit­ter does not slash its costs, ac­tivist in­vestors who have ag­gres­sively pushed US com­pa­nies in re­cent years for bet­ter cash man­age­ment, lead­er­ship changes and new strate­gies - may see Twit­ter as an ap­peal­ing tar­get. “Carl Ic­ahn - Twit­ter needs you,” Bronte Cap­i­tal’s John Hemp­ton, an in­vestor known for short-sell­ing, or bet­ting against stocks, wrote in a blog post ear­lier this month, re­fer­ring to the well-known ac­tivist in­vestor. Twit­ter “should be fixed with ex­treme prej­u­dice by a dis­in­ter­ested outsider be­fore it is sold again to a strate­gic buyer,” he added.

Com­pa­nies of­ten re­sist ac­tivist cam­paigns, and some­times a proxy fight takes place, where the in­vestor tries to re­place board mem­bers with its own nom­i­nees. On rare oc­ca­sions, com­pa­nies in­vite friendly ac­tivists to get in­volved be­fore they be­come hos­tile. Last month, hard­drive maker Sea­gate Tech­nol­ogy Plc in­vited ValueAct Cap­i­tal in as an in­vestor, sell­ing a roughly 4 per­cent stake to the ac­tivist hedge fund. ValueAct re­ceived an ob­server board seat as part of the deal, but no vot­ing power.

Twit­ter could also ex­plore ways to bring in an out­side strate­gic in­vestor to as­sist in a turnaround. But find­ing the right com­pany to in­vest in Twit­ter with­out it look­ing like a des­per­ate move could be tricky, pri­vate eq­uity ex­ec­u­tives said. What­ever Twit­ter does, it needs to act fast. For­mer high-fliers Zynga Inc and Groupon Inc, which now trade at a frac­tion of their ini­tial pub­lic of­fer­ing prices, stand as star­tling ev­i­dence of how quickly an In­ter­net star can fade. — Reuters

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