The Case For Acquiring Twitter Inc (TWTR) by Adam Putz, PitchBook
Google? Out. Disney? Pass. Apple? Meh. Salesforce? Maybe. But Salesforce seems like such an odd choice to acquire Twitter anyway—a CRM SaaS giant taking over a struggling social media company? Weird. Cue a 5% drop in its share price last week. But never write off Salesforce CEO Marc Benioff, even with shareholders largely against him on this one.
TWTR has a roughly 9% weighted average cost of capital, The New York Times reports per Morningstar, with an operating profit of $700 million after a projected loss of $270 million next year. To generate an ROI greater than its current WACC, a buyer should be looking to pay about $7.7 billion for Twitter, according to the report. Even after Wednesday’s close just slightly up at $18.05 per share, Twitter’s likely still hoping to see an offer well in excess of its approximately $13 billion market cap.
So, now that most of the big strategic acquirers have dropped out of the hunt, what’s the case to make for acquiring Twitter?
Employing something called “rigorous conjoint analysis methodology,” a recent TWTR and Research Now customer insights study found that 66% of users have discovered a new small or medium-sized business on TWTR, 94% plan to purchase from the SMBs they follow, and 69% made a purchase from an SMB because of something they saw on the social media site. Ad revenue could grow over time here, as Twitter ramps up its live video offerings to increase its otherwise stagnating user numbers. However, it could still be too little too late. TWTR would benefit from an acquirer in a position to capitalize on this function by combining it with an existing customer service platform. And on these grounds alone, Twitter still looks like a soft target, even for Salesforce, which already scrapes Twitter data for leads and the like.
Price per user
An alternative way to calculate the value of Twitter is its price per user. Twitter averaged about 313 million monthly users last quarter. At a market cap sitting around $13 billion, that comes to $41.53 per user. Microsoft paid handsomely by comparison when it picked up LinkedIn for $26.2 billion—translation: $60.51 per user. Since that time, a mere four months ago, Twitter’s users have accrued $9.88 in individual value over their mid-June total. But Twitter still looks like a steal, just slightly less of one. If Twitter’s share price continues to fall as it struggles to find a buyer, it’s price per user will also come back down and those looking to make a Big Data purchase could renew their interest.
Again, people like using TWTR to do something most of us otherwise hate—customer service. That could encourage, say, Comcast to address its abysmal customer service record and stem some of the cord-cutting tide by striking a two-birds-with-one-stone deal. Moreover, TWTR has millions of users and the data that comes with them. With one of the cheapest prices per user on the market, Twitter looks more like a Big Data buy—one that even Facebook could take another run at.
Either way, TWTR will remain a target for acquisition, though whether on these grounds the company can justify its sticker price is another question. As John Hempton, who runs an Australian hedge fund, has argued, TWTR “should be salvageable” if it can save half a billion dollars. But that, Hempton said, could require a real “Wall Street bastard” stepping up from the world of private equity, someone who would start by firing CEO Jack Dorsey:
“Carl Icahn – Twitter needs you.”