Photographer: David Paul Morris/Bloomberg

Hedge Fund Manager Lays Out His Simple Case for Why Twitter Will Still Get Sold

There's a huge opportunity to slash costs.

Since the morning of Sept. 23, shares of social media platform Twitter Inc. have been trading almost solely based on expectations of imminent M&A activity.

By early October, reports of multiple interested suitors — including Alphabet Inc., Walt Disney Co., and salesforce.com Inc. — had helped shares of Twitter crack the $25 mark for the first time all year. News of a yawning gap between management's longed-for sale price and that of the would-be purchasers, as well as reports that some potential bidders weren't interested, soon brought the stock crashing back down to earth, however.

In a blog post, Bronte Capital Management Chief Investment Officer John Hempton explained why he is "long [Twitter] for the takeout which I see as inevitable."

TWTR US Equity (Twitter Inc) Lin 2016-10-11 06-49-36
Source: Bloomberg

Reported potential suitors have all been so-called strategic buyers — firms that could integrate Twitter into their existing business operations. Hempton, however, concludes that: "This company should be and probably will be bought by an aggressive financial buyer."

Twitter's revenues, he notes, have risen by 234 percent from the fourth-quarter 2013 to the same period in 2015. Total operating expenses, meanwhile, have also more than doubled over this stretch and continue to exceed revenues — and therein lies the opportunity for a financial buyer.

Hempton wouldn't have a problem with these surging costs if they coincided with a commensurate benefit in the Twitter user experience, but says that's far from the case.

 "As a pretty dedicated tweeter (with almost 20,000 followers) — I have noticed almost no changes in Twitter that improve my user experience. It is almost impossible to find out what they spend that $1.5 billion extra per annum on," he writes. "I gather there are some improvements in the monetisation side but this is just a website — and it does roughly what it did in 2012 ... but spends well over a billion dollars more to do the same thing."

When a debt-laden buyer swoops in to buy the company, he or she should be able to generate  an operating margin of at least 40 percent by cutting labor costs, estimates Hempton, who implored one of his fellow hedge fund magnates to come forward.

"Carl Icahn — Twitter needs you," he quipped. 

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