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At the beginning of this year, Twitter CEO Dick Costolo was rumored to be stepping down immediately (he didn’t). Then, there was the rumor that Google (or Facebook or Apple) was buying Twitter (they didn’t).
And, since everything seems to come in threes, the latest scuttlebutt is a new report in Barron’s, citing “chatter” that Twitter is the acquisition target of two separate companies, possibly Google and Facebook, with the social network hiring Goldman Sachs to help fend off the potentially hostile attack.
But, according to not-so-chattery Re/code sources, although Goldman has been Twitter’s longtime banker, it is not working on such a parry. And sources close to Google and Facebook noted that even though the pair have looked at the company in years past, there are no current discussions going on.
That makes sense since any kind of hostile takeover in Silicon Valley is rare — Microsoft’s failed attempt to buy Yahoo notwithstanding — due to issues around maintaining talent and cordial relations in the often incestuous tech landscape. Which is not to say that Google, Facebook and Apple would not be obvious acquirers of Twitter, along with more creative global ideas like, say, SoftBank or even Alibaba.
Of course, this isn’t the first time the idea of a Twitter takeover has been floated and it will not be the last. But execs and those close to Twitter have taken pains to insist the company is not for sale and that it intends to remain an independent public company.
Back in January, in fact, Twitter’s board members came storming out of the New Year with public praise for Costolo, who had been under fire for the company’s slow growth and slumping stock price through the tail end of 2014.
Those are the two key reasons these rumors keep surfacing, and why activist investors are watching Twitter closely for any opportunity to attack. There is no question the company is indeed vulnerable and, despite a solid financial showing in Q1, Costolo seems destined to be a permanent fixture on the investor hot seat.
As one source told Re/code’s Kara Swisher in January: “Dick has nine lives, but he might be on his eighth at this point.”
So, it begs the question: Why is Twitter such a persistent target of investor rumor-mongering? Here are a few things to consider when discussing the possibility of a Twitter takeover:
Management Instability
Twitter’s management has been rocky for most of the company’s existence, so much so that Facebook’s co-founder and CEO Mark Zuckerberg once said: “Twitter’s such a mess — it’s as if they drove a clown car into a gold mine and fell in.”
Funny perhaps, but true! Along with three CEOs since the company started in 2006, Twitter has been through more heads of product — also three — in the past 18 months than Facebook has in the past decade.
And COO Ali Rowghani’s tense departure last summer led to a number of other high-level executives leaving behind him. When there’s such shakiness in management, there is a general malaise that can creep over a company and a decidedly public perception of it being, well, a clown car.
That said, if anyone ends up taking over Twitter, that person or company would need to get through Ev Williams and Jack Dorsey, Twitter’s co-founders and current board members. The duo owned more than 13 percent of the company as of this time last year, and they still speak at company all-hands meetings when necessary (like they did in January to praise Costolo). As co-founders, they have both personal and monetary incentives to stay heavily involved and, more to the point, to resist or approve of a sale.
As you can see from this tweet, Dorsey has been vocal about support:
https://twitter.com/jack/status/560860120251244544
And at Code/Media in February, Williams said clearly about Wall Street machinations around Twitter: “Wall Street does not have a sophisticated understanding of what creates value in this world. Hopefully, that will improve over time. That’s a conversation I’m trying to start.”
User Growth Is Still a Problem
User growth has been an issue for Twitter since it first unveiled such totals in late 2013. The company added just four million new users last quarter, not enough to keep investors happy. In fact, a lot of the executive turnover mentioned above resulted from the struggles with addressing these growth issues.
This may be one major reason for Twitter’s board to consider a sale. It must be frustrating to watch growth stagnate, even as the company has proven it can make money off the users it already has. It’s not a stretch to imagine that an acquisition by a larger consumer company might be able to help Twitter become larger, precisely because it can’t do it itself.
In fact, it’s not so much that you sell Twitter to boost growth — it’s that you sell Twitter because you can’t boost growth.
Facebook, for example, is masterful at acquiring users for its properties like Instagram and WhatsApp. Google aiming its massive fire hose at Twitter might have the same results, especially with an integration strategy to get the service in front of more eyeballs.
Stock Vulnerabilities
Simply put, Twitter doesn’t have a dual-class stock structure, which makes it susceptible to a possible takeover from an outside investor. As one source explained to Re/code earlier this year: “This single class of shares makes Twitter inherently reactive to investors on the plus side. And, on the down side, very susceptible when things are not going well.”
That doesn’t mean the company is totally vulnerable. While Twitter doesn’t have a dual-class stock structure now, its board can quickly implement one if needed. Yet another reason why going through Williams and Dorsey will be a necessity to anyone interested in taking Twitter. This board — a rather cooperative and even stubborn group — doesn’t have to do anything it doesn’t want to do.
Twitter’s Price Tag
Twitter may simply be too expensive. The company is creeping up on a $33 billion market cap, after a recent run-up in its stock, and an actual sale price would likely be much higher. That doesn’t mean companies couldn’t afford it; Google has $64 billion in cash on hand, and Apple has $178 billion.
But a deal this size would be unusual. Facebook floored people when it paid $19 billion for WhatsApp in February 2014, and Google’s largest deal to date was the $12 billion Motorola acquisition in 2011. Apple has not made major purchases, although it certainly has never ruled them out.
What is clear is that the consistent worries about Twitter’s future make for a very volatile situation. As Re/code also noted in January:
“Well, there is an eternal goal of manipulating the stock. All the rumors floating around related to Costolo — from him immediately stepping down at various times or Google buying the company, two recent ones that seem less than accurate — currently seem more designed to do that as they are eagerly lapped up by the media and regurgitated.”
In other words: Smoke. Until, of course, there’s fire.
This article originally appeared on Recode.net.
