Deals

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Like the rest of the world -- possibly including Twitter's own board members -- we have no idea if Twitter will stay an independent company. Speculation about a sale has circulated forever, and has never panned out. Yet. But one thing is abundantly clear: Twitter's stock direction is tightly linked to takeover rumors.

So far this year, Twitter's stock price has jumped 4.8 percent or more once every six trading days on average, or 24 out of 169 market sessions. And half of those stock pops are likely related to rumors, reports, hopes and dreams that Twitter might be acquired or could become the target of activist shareholders, according to a Bloomberg Gadfly analysis. These were mostly thin threads of takeover speculation, but that's all that is keeping Twitter's market value afloat these days. 

Shouts & Murmurs
Twitter had stock jumps of at least 4.8% on 24 days this year -- or about once every six trading sessions. Of those daily stock pops, half were likely tied to takeover-related rumors or reports.
Source: Bloomberg Gadfly analysis
Note: Daily stock jumps are based on the intraday high price from prior market day's closing price.

Our analysis is imperfect. Sometimes it's hard to pin down exactly why a stock price goes up or down on any given day. But we can probably all agree that it's simply nuts for a company with a $14 billion market value to be roiled by takeover chatter as often as Twitter is. 

Twitter deserves some of our collective pity for this roller coaster ride. The company's market value soared as high as $42 billion after it went public nearly three years ago. The hope was Twitter might grow as big as Facebook some day. As the number of Twitter users stalls and more recently as the company's advertising revenue growth cools off, it's now clear that won't happen. It might still be a great company with a product that hundreds of millions of people use and that many advertisers value, but it won't live up to the grandest of grand hopes. Rightly or wrongly, that outcome is a failure in many people's minds. 

Going in the Wrong Direction
Twitter's user growth and its revenue growth are hitting the skids, which has made investors wish for a takeover
Source: Twitter

And so those disappointed with Twitter have turned to hopes of a sale. Good luck with that. There are only about a half dozen companies in the world that would make sense as owners of Twitter and have the deep pockets to pull it off. If we applied to Twitter the very sweet 50 percent premium that Microsoft agreed to pay in its LinkedIn purchase, it would imply a takeout value of almost $19 billion, or roughly 27 times Twitter's (heavily adjusted) Ebitda expected for 2016. That would be roughly in line with the pricey multiple in the deal for LinkedIn, but analysts expect LinkedIn to grow faster than Twitter and to be more profitable.

If that type of Twitter deal valuation didn't give a potential buyer pause, perhaps questions over whether the company's earnings are propped up by its aggressive non-GAAP accounting and its willingness to throw stock pay at employees might

Not for the Faint of Heart
Twitter isn't the most expensive Internet stock, but it's not bargain-bin material, either.
Source: Bloomberg

The wild-card scenario is that a giant company like Google or Facebook will take a stab at buying Twitter -- no matter the valuation. Either of those companies could easily absorb Twitter, hide the company's financial results and tack it onto their existing advertising sales machines. Still, it's not clear even Google or Facebook -- relatively immune from caring about what their shareholders think -- would be willing to buy Twitter now, rather than wait for it to sink even cheaper. But you never know what rich companies will do with their money.

In the absence of takeover bids, speculation that an activist investor will demand a sale has kept the Twitter rumor mill churning. This idea gained particular traction on Thursday as CNBC reported that Twitter's board is "well aware" of the threat of an activist shareholder and that some are taking a look.

Here's the thing, though. It shouldn't really be surprising that activist investors would be kicking the tires at a company that has hit as clear and deep a rut as Twitter has. They wouldn't be very good activists if they didn't look at every opportunity like this. That doesn't mean one is going to actually get involved here. In fact, it probably won't happen.

If Twitter isn't going to get sold -- see above -- then it's hard to see how an activist investor would create much more value beyond the company's already expensive multiple. Activist investors have in the past sought buybacks and breakups from tech companies, but neither makes sense here.  One intriguing possibility is the opportunity to lift Twitter's profits by forcing the company to cut stock compensation and other costs. But pushing for cost savings at Twitter may not generate a tantalizing enough return to tempt an activist.

It's also possible CEO Jack Dorsey's firing could become a rallying cry, though it's not clear that anyone else has better ideas as to how to get Twitter's growth going again. In the absence of good ideas, then, let the takeover hopes and prayers continue. Just realize that's all they are at this point.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. CNBC's David Faber made a similar point in his report.

To contact the authors of this story:
Shira Ovide in New York at sovide@bloomberg.net
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net