- Recode's latest report suggests that Google, Apple and Disney are out of the race.
- Around the same time, Reuters reported that Twitter is looking to conclude a sale this month.
- Leaving aside the reports and sources that drove Twitter shares up and down, can a buyout still happen?
Recode's latest report suggests that Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL) and Walt Disney (NYSE:DIS) are out of the race to buy Twitter (NYSE:TWTR), leaving only Salesforce (NYSE:CRM) in contention. A report by Benzinga suggests that Salesforce's largest shareholder Fidelity Management is not in favor of a deal. Even as Twitter shares lost over 9% in after-hours trade on 5 October, Reuters reported that Twitter is looking to close a buyout deal this month, and Barron's carried a story titled "Tick Tock: A Twitter Takeover Draws Near". Leaving aside the reports and 'sources' that have caused Twitter shares to gyrate in both directions, let's take a logical approach to evaluate if a Twitter buyout can still happen.
First things first, most of these 'sources', across the board, concur that Twitter wants to get acquired, be it Recode or Reuters. So let's look at it from the perspective of potential suitors.
Can Salesforce Buy Twitter?
Well, technically, yes, but such a buyout would come at a gargantuan cost, as Douglas McIntyre of 24/7 Wall St. highlighted a few days go. Our numbers vary slightly, but the conclusion is largely the same.
As of July 2016, Salesforce has current assets worth ~$3.3 billion. Now it's unlikely that Salesforce can free up cash from customers (accounts receivable) whenever it pleases. But for argument's sake, let's assume that all of it is available to Salesforce, in the event that it decides to bid for Twitter. It would still need to borrow a significant amount of money, and issue stock to complete the buyout.
Salesforce has a long term debt of ~$2.9 billion, and a shareholders' equity value of just over $6.1 billion. Even if Salesforce raises debt to the extent that its debt/equity ratio becomes 1, it would be able to raise another ~$3.3 billion. Combined with the company's current assets, that would give Salesforce ~$6.6 billion, implying that it would have to issue stock worth over $11 billion to acquire Twitter, which closed the day at a market cap of $17.6 billion.
So, assuming Salesforce pays absolutely no premium over Twitter's current stock price, such a move would dilute earnings by 23.6%, potentially dragging the company's stock heavily. And, do note that we're being generous on a couple of counts in this estimation.
It comes as no surprise that reportedly, Fidelity Management isn't thrilled. And all of this for what? Data?
The Data Is Gold Dust Argument
Two days ago, WSJ quoted Salesforce CEO Mark Benioff as saying "Data is the currency in software’s new world order". Most reports that speculate a buyout have been talking about Twitter's data as a "treasure trove". Sure, there's no disputing that. But, anybody who's looked closely enough at Twitter, most of all these 'potential bidders' would know that data licensing is something Twitter makes money off. If all of this data was really so valuable, growth in that revenue stream should have exploded, but apparently, it hasn't. Year-on-Year (YoY) growth in data licensing revenue is also near its lowest at ~35%, and the reason it contributes a bigger chunk of Twitter's revenue now, is because ad-revenue has slowed.
What's more, Google, one of the 'potential suitors', signed a deal with Twitter almost one and half years ago to tap into Twitter's stream of tweets, or its 'firehose', which at the time spewed out ~9,000 tweets per second. It's reasonable to assume that Google has a fairly good handle on extracting insights from big data. Be it Salesforce, or Apple, which could potentially use Twitter to enrich its Apple News, data licensing is definitely one option. Sure, Twitter is a 'treasure trove'. But it's hard to imagine why anyone would want to pay tens of billions of Dollars for data that's available at a significantly lower cost.
The only argument that now explains Google's reported interest in Twitter, is Google's inability to compete effectively with Facebook in the social networking space. That's a valid argument, but at what cost?
Buying Twitter At These Valuations Makes No Sense
Twitter valuations have snowballed over the last fortnight, with the stock gaining ~34% since 22 September. Valuations have swelled so much that they could single handedly deter even a deep-pocketed suitor from bidding for the company. A few days ago, we wrote a detailed post to explain why a buyout was already priced into the stock at ~$22 per share. We won't repeat all of that here again.
More recently, billionaire venture capitalist Chris Sacca, who was once one of Twitter's largest shareholders also opined that he "doesn't see an acquirer paying more than the current stock price."
But then, a line from Shira Ovide's recent post on Bloomberg Gadfly has become one of our favorites:
"just because it doesn't make sense doesn't mean it won't happen."
We can only rationalize and estimate, we can't predict the future. When it comes to deep-pocketed companies like Google and Apple, you never know. Besides, if Twitter shares, which are already down ~12% in pre-market trade continue to fall, then beyond a point (a point that's very far away right now), a buyout might actually become worth considering.
Also Read: Why Twitter Is Not A Buy Now
So How Should Investors Play Twitter Stock Now?
If you're a conservative long term investor, or a value investor, the choice is simple. Just stay away. If you're one of those cowboys who wants to participate in what could Twitter's last rodeo, you'd probably do well to follow Sacca's lead. In the same post, Sacca says:
"I don't own as many as I used to because I'm not an idiot, but I own more than I should because I'm an idiot."
If you've already made some gains during this mayhem and still want to bet on a buyout, it'd be wise to exit partially. Even after what looks like an impending fall today, Twitter shares might continue to move on buyout speculation. Investors would do well to bear in mind that Twitter shares carry serious risks right now if a buyout doesn't come through over the course of this month.
If you're evaluating tech stocks, you might want to check out Amigobulls' top stock picks from the computer and technology sector.