Twitter Square Merger, Is It A Possibility?

  • Many speculations are thrown into the air about a possible merger between Twitter and Square.
  • Both companies could benefit substantially from such a move, in light of their competitive difficulties and business stagnation.
  • High valuations may be hard to overcome, however, a partnership between the two companies could achieve the same results.
Twitter Square Merger

Since Twitter’s (NYSE:TWTR) co-founder, Jack Dorsey, started the e-payment company Square, plenty of merger scenarios between the two companies were rumored that would benefit both sides. However, when Jack Dorsey stepped up to be Twitter’s interim CEO, plenty of merger rumors and speculations were formed, with most of them including Google (NASDAQ:GOOG), Facebook (NASDAQ:FB), and Square. In an earlier article, I covered the scenario of a possible acquisition of Twitter by Google to enhance Google’s social media offering and increase its market share substantially in that market. In this post, I will cover the Square-Twitter deal scenario that gained popularity once Mr. Dorsey started to act as a dual-CEO of Twitter and Square.

Benefits for Twitter

A merger between Twitter and Square is out of context and irrational at first: Twitter is a leading social and micro-blogging network while Square is an electronic and mobile payment service provider. However, both Square and Twitter are in a delicate situation in their business cycle and have been left behind the competition in their respective markets. Twitter experiences fierce competition from Facebook and Facebook's instant messaging apps, as well as other instant messaging apps like WeChat, Snapchat, and Line. Twitter’s rival, Facebook, has already broke out of the social media market and penetrated two of the hottest markets right now: virtual reality with the Oculus acquisition and e-commerce/e-payment with the new payment features slowly implemented into Facebook Messenger and managed by former PayPal president, David Marcus. If we look at the broader technology sector, all tech giants are entering the e-payments market: Apple (NASDAQ:AAPL) with Apple Pay, Google with Android Pay, Alibaba (NYSE:BABA) with Alipay, eBay with PayPal, and Facebook (as mentioned above).

Also see: Square IPO: Facing Deterrents of Intensified Competition and Management Instability

Twitter tested a buy button for a while but didn’t succeed in generating revenues from the new feature. Square's capabilities could allow for better support for the buy button and expand Twitter’s commerce offering into brick-and-mortar stores, as well as enhance options to purchase items directly from a tweet without leaving Twitter. Generating revenues from the buy button is one concept to implement Squares’ capabilities into Twitter; another concept might include a money transfer between Twitter users and in-person transactions, using a Twitter account Login enabled in Square’s POS.

Benefits for Square

It is clear that Twitter has a lot to gain from a merger with Square, but what's in it for Square? The e-payment company experiences intensified competition from Apple and Google that will have a significant impact on the company’s market share and expected revenues. Square has started lately to monetize its database and transaction analysis to offer unique insights for merchants and advertisers about store locations, preferred merchandise, retail trends, and more. As Square is a private company, very little information is known about this activity and whether it is even profitable; however, in order to maintain that business line, the company needs to have a continuous flow of information from the field. To keep the flow of information, Square needs not only to remain competitive compared with Apple Pay and Android Pay but also to offer a better solution and complimentary services.

Merging Twitter and Square together could allow Square to offer advanced money transfer capabilities based on a Twitter account directory, as I mentioned above, and enhanced in-person transactions by using Twitter’s credentials on Square’s infrastructure. By adding information from Twitter, Square’s payment insight business can add an important aspect of social media data and a broader perspective that could translate to higher prices for payment insights and transaction analysis.

Both Sides Benefit, Will They Merge?

As described above, both Twitter and Square will benefit greatly from a merger as it would help the two companies improve their competitiveness and increase revenue generation sources. However, the price of such a deal might make a merger impossible. In Square’s last funding round, Series E, the company was valued at $6B, which makes it a very expensive deal for Twitter. Twitter’s market cap is above $23B, so a scenario where Square purchases even a portion of the company is not relevant. The high valuations of both businesses also rules out a stock swap deal to merge the two. The only feasible scenario I see is a stock swap together with a debt offering/external financing to fund the deal. Currently, even if a merger makes sense from a business standpoint, financially, I do not see it happening anytime soon. However, the two companies could sign an exclusive strategic alliance agreement that will enable them to execute most of the benefits mentioned above and remain two separate companies. Having Mr. Dorsey in the main position at Twitter and at Square could easily make this move a reality. In the future, if such a partnership yields significant revenues and fruitful cooperation, the companies could reassess the merger scenario. The alliance could enable the companies to have a “dry-run” before the real deal.

Conclusion

The two companies need to look for new revenue sources to improve their positioning and increase revenues. A Twitter Square merger will benefit both companies greatly and will allow them to maintain their market shares in their respective markets while generating additional revenues. However, the high valuations of the two companies make it unlikely that such a deal might happen, and, in my opinion, the companies could achieve the same results by forming an exclusive strategic alliance that will mimic the benefits of a merger.

Disclosure: Information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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Comments on this article and TWTR stock

stocksman
bearish
Twitter & Square merger? Two turkeys don't make an eagle!
1 reply
Do share this awesome post