After LinkedIn's Acquisition Could Twitter Be Next?

  • Twitter shares rallied after Microsoft announced it was acquiring Twitter's peer, LinkedIn.
  • Twitter merger speculations have come to naught.
  • Is there a compelling case why any company would be interested in buying Twitter?

Twitter (NYSE:TWTR) shares were on a tear following June 14, tucking on gains of 11% in sympathy with LinkedIn (NYSE:LNKD) shares after Microsoft (NSDQ:MSFT) announced that it was buying the professional networking company for $26.2B, a huge 50% premium over LinkedIn price before the announcement. TWTR stock is now up 21.4% over the past 30 days (as on 23 June).

Twitter 30-Day Share Returns

TWTR-1

Source: CNN Money

Part of the rally was fueled by Twitter's announcement that it was investing $70M in music/audio sharing platform, SoundCloud. The Berlin-based company likes to call itself the ''YouTube for audio'' and claimed it had 250M users as of last October, not far from Twitter's own 310M users. A large chunk of Twitter users already use SoundCloud's mobile apps. SoundCloud monetizes its services through a mixture of ads and subscription services.

A recent round of funding valued SoundCloud at $700M, so Twitter's ownership in the company is around 10%. By partnering with Twitter, SoundCloud will be in a good position to strike licensing deals and ramp its audio ad sales. In return, the acquisition will bolster Twitter's attempts to become a media sharing/distribution hub, a niche it's not been particularly successful at exploiting.

Twitter could be in someone's crosshairs

Much of Twitter's rally, however, is directly attributable to investors' hope that one of the tech heavy weights could soon acquire it. This is of course not the first time that such speculations have surfaced, though the acquisition of LinkedIn has lent them a lot more credence this time around.

Both Twitter and LinkedIn still sport stratospheric valuations even after being badly battered over the past couple of years. And, both companies have never been able to turn a profit consistently due to their high marketing expenses and stock-based executive compensation.

Both Twitter and LinkedIn, however, are still growing at an admirable clip, with year-over-year top line growth of 36% and 35%, respectively during the last quarter.

With Twitter stock down 26.4% YTD and having lost 74% of its value since January 2014, the company certainly looks a lot cheaper than ever before. Several companies have in the past been named as potential suitors for Twitter. These include Apple (NSDQ:AAPL) and Alphabet Inc-C (NSDQ:GOOG), among others. But of course, unless a potential acquisition target brings some serious synergies to the table, no company worth its salt will buy it just because it happens to be cheap.

In the case of the Microsoft/LinkedIn buyout, LinkedIn makes sense for Microsoft, the biggest enterprise software vendor on the planet. LinkedIn will give a nice boost to Microsoft's Productivity and Business Process segment. Microsoft might decide to integrate LinkedIn in some of its popular connectivity apps such as Skype and its email system. In effect Microsoft will gain access to valuable content from one of the world's most influential and highly specialized digital media companies.

By the same token, it's not hard to see why Twitter would be valuable to a company like Apple or Google. In the case of Apple, the company has negligible social media presence, with the exception being a couple of notification features on OSX and Apple Music. With declining iPhone sales, Apple is turning to other growth avenues, including its Services business. Apple recently juiced up the cut for App Store developers to 85% of app revenue from 70% in a bid to accelerate App Store growth even further.

For all its troubles, Twitter is still growing like a weed. It's worth noting that Twitter recorded a small but positive 3% MAU growth during the last quarter, which probably implies that the changes the company has been making to its user platform could be working. By buying Twitter, Apple would not only gain a fast-growing revenue stream, but also valuable social media presence.

But perhaps Twitter would be an even better fit for Google. Google has tried several times to enter the social media space, but its efforts have mostly come to naught. Google+ is Google's best social media experiment. People use Google+ to gain access to Google Drive, Gmail, and a host of Google services. But less than 1% of those use the platform actively as a social site.

GOOG-3

Source: Business Insider

The biggest reason why Google+ has failed to catch on as a social site lies in the fact that Google designed it primarily as site to solve its own problems rather than site where people went to connect with each other. Google+ has a poor social experience compared to Facebook (NSDQ:FB) or Twitter.

Google is by and large an ad company and needs to stay on top of social events. The company has done well in video, mobile and web. Social media remains Google's biggest missing link. By buying Twitter, Google would gain a huge and instant social presence, not to mention tons of useful data that it would use to enrich the ROI of its ads, especially programmatic ads.

Can Twitter Get a Good Price?

Twitter investors will, however, be lucky to get the 50% premium that LinkedIn got from Microsoft. In the case of Microsoft, there are reports that it had to counter-big against Salesforce (NYSE:CRM) which had also expressed interest in buying LinkedIn.

Then there is the question of declining users. Companies frequently use this as leverage to drive down the price when negotiating a purchase, as evidenced by Yahoo's (NSDQ:YHOO) ongoing sale attempt. But if Twitter can continue growing MAUs like it did last quarter, then this will not be a problem.

But ultimately Twitter would be a good catch for either Apple or Google. Twitter does not offer preferred shares, making it easy for it to be acquired. One big reason why LinkedIn agreed to be acquired is that it was constantly struggling with brain drain due to a depressed stock price. Twitter is in pretty much the same situation and this could motivate it to follow suit.

Twitter stock routinely jumps about 12%-15% whenever speculations about potential merger hit news feeds. A buyer would probably have to cough up at least double that, pointing to a premium of 25%-30%.

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