Google’s Buyout of Twitter Would Be Positive for GOOG

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Unconfirmed rumors that Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) could be looking to acquire social media and microblogging company, Twitter Inc (NYSE:TWTR), has sparked a rally in Twitter shares, which have gained more than 40% so far in 2015.

goog google stock earnings stockGoogle shares, however, remain relatively flat, as the market probably has not made up its mind what to make of the merger — but investors seem to think the deal unlikely.

This is not the first time that a Google-Twitter tie-up is being floated around — such speculations go as far back as 2009. If, however, the rumors turn out to be true this time around, then GOOG shareholders should probably applaud the company’s management.

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GOOG is a Cash Cow

Google is a well-known cash cow. The company’s core business of selling ad space requires low capex, yet it yields fat profit margins. GOOG has actually been generating cash quicker than it spends it.

Even though the company is a major M&A force, most of the companies it buys are quite tiny, and many cannot be truly said to generate significant amounts of shareholder value. A few notable exceptions to this are YouTube, airline booking company ITA Software, and maybe mobile hotel booking app Room 77, a startup that is backed by online travel agency, Expedia Inc (NASDAQ:EXPE).

Many of Google’s other mergers and investments are either of questionable value or even a downright waste of shareholder resources. GOOG acquired Motorola for a whopping $12.5 billion in 2012, only to sell it barely 2 years later for just $3 billion to Lenovo, booking a huge $9.5 billion loss. In its defense, GOOG kept almost all of Motorola’s patents, which experts claim are worth about $4 billion.

GOOG also spends a tidy sum on R&D projects such as Google Glass or driverless cars, though I’m sure its shareholders wouldn’t mind at all if it scaled down spending on its ‘‘moonshot projects.’’

No Dividends, No Share Buybacks

GOOG is the largest company in the S&P 500 that doesn’t pay a dividend. Google isn’t exactly a share buyback champ, either — only repurchasing its own shares after a large merger to avoid diluting its shares excessively.

The result: The company’s cash hoard has been growing at almost 20% CAGR, and has ballooned to more than $64 billion or 16% of the company’s market cap. Google’s cash hoard is currently only second to Apple Inc.’s (NASDAQ:AAPL) in the S&P 500.

Google’s reluctance to pay dividends or buy back its own shares is understandable. Fast-growing tech companies tend to shy away from paying dividends or share repurchases because they view it as an admission that the company’s management has run out of useful ideas on how to spend its money wisely.

But that raises the question: What on earth is it going to do with that money?

Twitter Benefits for GOOG

If the Google-Twitter deal were to become a reality, it would be the second-largest merger ever in the tech sector since Twitter is valued at around $33 billion.

One of the biggest benefits that Twitter would bring to Google’s table would be to help the company to solve its perennial social and mobile problem. Since 2004, GOOG has been trying really hard to establish some presence in the social media space, but almost all its social projects have gone bust.

GOOG has tried out initiatives such as Google+, Orkut and Jaiku, all of which failed to gain meaningful traction.

Perhaps the most promising of these projects was Buzz, which GOOG launched in 2010. Buzz worked on the premise of creating a social network based on the user’s email database. Buzz, however, only lasted a year after the U.S. Federal Trade Commission decided to act on complaints that the service violated Google’s privacy policy. Buzz was shut down in 2012.

Twitter, of course, faces no such popularity problems, with more than 300 million highly-engaged users. A lot of these users send out their tweets on mobile — more 70% of Twitter’s revenue is mobile-based.

GOOG has for long been struggling to crack the mobile dilemma. Part of this is due to the way the company operates — GOOG is unable to track ads across multiple devices to understand how users respond to it ads. Although the search giant collects cookies, it cannot share them across different products, courtesy of government regulations.

For instance, GOOG cannot mix the data from its own search engine with that from DoubleClick, a tool that the company uses on partner non-Google sites. Social media companies such as Twitter and Facebook enjoy a lot of leeways when it comes to tracking user activity and preferences, which naturally gives them an upper-hand when it comes to monetizing their mobile platforms.

Ad revenue is Google’s bread and butter, accounting for more than 90% of the company’s top line. Even though Google’s revenue is still growing at a healthy clip, it has slowed down by a quite a good margin due to a 30% decline in the company’s cost-per-click. A strong mobile platform from a company like Twitter would provide Google with a new growth avenue.

The Bottom Line

If Google’s merger with Twitter ever sees the light of day, it could be positive for the search giant in a big way. The acquisition would have the potential to accelerate growth for the company, and would also be one of the better ways to put its huge cash hoard to productive use.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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