Today’s big news is rumors of a Twitter buyout. According to “sources,” whatever that means, Twitter is close to receiving a formal takeover offer. This makes Twitter the latest so-called business with a huge internet presents, but no way to make money, to be snapped up by another company that thinks that they know what Twitter doesn’t: how to make money.
Twitter is, of course, a huge internet icon. Unlike Tumblr before, which never made a penny, and was inexplicably snapped up by Yahoo. Yahoo came to find out that Tumblr not making any money may not have been by choice. The company never reached anything even close to the modest $100 million goal set for it, and was eventually written down by Yahoo as essentially worth nothing, despite having paid $1 billion for it.
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Which brings us to Twitter.
Twitter does make some money. Twitter’s second quarter filing showed revenue of $602 million for the quarter, but a loss of $107 million. A little math shows that it costs over $700 million just to run Twitter each quarter.
And, that may be where other companies think they can do better. Although Yahoo was naive to believe that Tumblr could make anything resembling a reasonable amount of revenue from its user base, it appears that Twitter can pull in billions of dollars per year, if only they could do something about their multi-billion dollar cost structure.
One of the rumored takeover possibilities is Google. Google already runs an enormous infrastructure. If it could use that, and successfully integrate whatever else it needs from Twitter, all at a lower ongoing cost, then there is money to be made here. After all, it only take a $100 million cost cut to turn Twitter profitable. Google also already has a very successful advertising operation that it can extend to Twitter as well. So, theoretically, if Google could run Twitter for cheaper, plus earn more money per user than Twitter does, then there is some big money here. There is also the intangible benefit that full access to Twitter’s firehose of data and posts might offer for Google’s flagship search platform.
Another rumored company for the takeover is Salesforce. This transaction would be more like Microsoft buying LinkedIn earlier this year. There is no obvious way for the company do directly make money on the acquisition. Salesforce’s infrastructure is big, but not absorb Twitter big. Likewise, it wouldn’t be instantly able to increase any ad revenues from Twitter either. So, the goal for Salesforce would have to be more along the lines of, “We think this will help us grow and build other Salesforce things,” rather than a, “We think we can directly make money from Twitter.”
Is this a good idea.
I haven’t extensively studied Twitter, and I have no investment in it now. If you don’t either, now is too late to buy. (Buy the rumor, sell the news… this is the news, not the rumor). That being said, my cursory look at Twitter and Salesforce tells me that this is like Microsoft buying LinkedIn, or Yahoo buying Tumblr. It’s more about how it looks than the value it actually has. I would expect Salesforce to announce ongoing struggles in integrating Twitter if they are the buyer. I doubt there would be a total write down like Tumblr, but I think it will cause more harm than good. Salesforce is big enough to eventually bury whatever the result is inside of its own financials, but you won’t hear any bragging beyond, “We are satisfied with…” as a way to keep it from looking like the acquisition was a mistake.
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If Google is the buyer, then I think that it will probably end up being a good acquisition. It continues to give Google more desk space (phone screen space?) while also providing a pretty straightforward path to profits. On the other hand, Google is already very big, and very profitable. I doubt, a Twitter acquisition would affect their earnings buy much more than a few decimal places on the financials.
I never directly recommend buying or selling stocks, but if the buyer is Salesforce, I’d look long and hard at what the company says it thinks it can get out of the acquisition. If it all seems a little too maybe then I’d reevaluate how Salesforce does or does not fit in your long-term portfolio.
This is not an offer to buy or sell securities. The author does not currently own any position in Salesforce, Twitter, or Google, although may change at any time. The author does own a small amount of Microsoft stock.