In retrospect, it’s surprising that shares of Twitter Inc. (NYSE:TWTR) were up only 4% on Tuesday in the wake of rumors it was a takeover target.
Even more bullish for TWTR is the rumored buyer — Google Inc. (NASDAQ:GOOG, NASDAQ:GOOGL), which has the financial wherewithal to pretty much buy whatever it wants.
Yes, acquisitions are like recessions, in that far more are predicted than ever actually materialize. A Twitter buyout by GOOGL, however, not only seems more plausible than most off-the-cuff acquisitions predictions, but it actually makes good sense.
The only aspect of it that should surprise current TWTR owners is that the idea or even an offer hasn’t been put on the table yet.
A Twitter Buyout Is Back on the Radar
To be crystal clear, neither Google nor Twitter has said a word regarding an acquisition of the micro-blogging site … not even to deny (or confirm) the possibility. The rumor has been almost entirely circulated by the TWTR trading crowd, and parroted by the media as a possibility.
On the other hand, the crowd has a knack for being collectively right more often than it gets credit for. So don’t dismiss the possibility.
And if it is just chatter that has gelled into a full-blown rumor, then it has done so with a curious amount of detail that normally wouldn’t surface unless there was truly something to it.
Case in point? Goldman Sachs was cited as the investment bank enlisted by Twitter to “fend off a takeover offer.”
Why Twitter Is the Ideal Acquisition Target for GOOGL
While the rumor in itself is interesting, even more interesting are the whispers that Twitter is looking for ways to evade a buyout.
Like most companies, Twitter’s management and TWTR owners act as if they’d prefer to be left alone to grow the company as it sees fit. As Quantum Trading Strategies CIO Sean Udall voiced it:
“It’s a very powerful company already,” he said. “I don’t want Twitter to get bought out. I don’t think most shareholders who believe that story want Twitter to get [acquired]. I think you’d have to pay 100 percent premium. I don’t see shareholder approval happening at anything less than $60-$65 billion.”
In that same vein, even if Twitter can become a giant on its own, it’s going to take time. There’s an opportunity cost in waiting for TWTR to hit its maximum value. As Udall suggested, a reasonable Twitter buyout offer would mean at least a 13% premium from Tuesday’s closing price. Indeed, Udall believes a price closer to $80 would be necessary to really get shareholders interested. If such an offer materializes, current owners might want to take what they can get while they can get it.
But what’s downright compelling about a Twitter buyout is what it would do for Google.
Calling a spade a spade, Google owns a significant portion of the world. One area where it’s conspicuously lacking, however, is in the social media realm. Its Google+ answer to the proliferation of Facebook Inc (NASDAQ:FB) was a non-starter from its inception, only amassing 300 million users at its peak last year.
For perspective, Facebook boasts 1.39 billion monthly active users as of the end of 2014. Translation: Google+ was never going to compete with Facebook.
Twitter, on the other hand, has a shot at making a run on Facebook.
The real winner here, however, are fans, followers and users of Twitter, and maybe TWTR shareholders as well.
Like it or not, Google is far better equipped to maximize Twitter’s potential than Twitter is equipped to maximize its own potential. Not only does Google have a much wider network of users it can steer toward becoming Twitter users (Gmail alone has half a billion users), but Google also has more than a decade’s worth of experience at selling online ads. Twitter is still trying to get all the way into its ad-selling groove.
Bottom Line
It’s understandable for companies as well as investors to think they’re better off on their own rather than part of a bigger entity, and potentially buried by that entity’s sheer size. That’s egotistical thinking, though, not strategic thinking.
It’s also an apropos part of any discussion regarding a Twitter buyout by Google right now, as both companies have a growing problem they need to solve now, before it’s too late.
That problem is called Facebook.
Facebook is slowly digging into Google’s search and advertising business, in some ways by circumventing the need for a worldwide web search by simply keeping users planted on a Facebook page. Facebook also is fending off Twitter’s social networking ad business, and Instagram is already bigger than Twitter. Together, GOOGL and TWTR might actually be able to make a united front and slow Facebook down. Separately, they both may continue to struggle, especially in the mobile arena.
And as a stark reminder of how things can go sour by holding out a little too long or playing a little too hard to get, just talk to Groupon Inc (NASDAQ:GRPN) investors who were around in mid-2012, before GRPN went public. The company rejected a $6 billion acquisition offer from Google, certain the online-coupon company could do better on its own. Today, GRPN is a $4.8 billion company, and struggling to hold onto that valuation.
Is Twitter a stronger company than Groupon? Probably, but never say never.
In other words, TWTR owners might not want to fend off a suitor just to make a point. Sometimes doing a deal really is a win-win, or at the very least replaces risk with the certainty of cash.
In any case, the requisite prediction (and nothing more than this observer’s opinion): There’s a 70% Google buys Twitter at a price around $80, and if it happens, there’s a 90% chance the partnership works out well.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
