Oil prices aren’t the only risky assets that are being hotly debated by investors. By now you’ve probably heard the news that Microsoft (MSFT) purchased LinkedIn (LNKD) in one of the biggest tech deals in history. Microsoft paid $26.2 billion for the professional-focused social media service, which was a generous 50 percent premium over LinkedIn’s share price.
LinkedIn isn’t the only company that enjoyed a rise in its share price. Twitter (TWTR) is up 13 percent since the news that LinkedIn was acquired broke. Twitter has long been speculated to be a potential acquisition target, and the LinkedIn news only heightened that speculation.
Ignoring all the rumors (Alphabet’s Google buying Twitter seems to be the most popular of these rumors), it’s easy to see why Twitter could make a good acquisition for a larger company. While user growth is slowing and monetization is elusive, Twitter has the brand recognition and user base that many companies would love to have as an asset.
Considering how poorly the troubled social media service has fared since its 2014 IPO, Twitter management owes it to investors generate some value for the shareholders.
Share Prices Are Low
Twitter went public to much hype back in Nov. 2013. The company’s IPO price of $26 nearly doubled during its debut to an impressive $45. All looked well with Twitter, as the company had the name recognition and massive audience that most social media networks could only dream of.
Share prices rose to $69 in early 2014, giving investors who got in on the IPO an incredible 165 percent return on investment. That, however, was the beginning of the end and the company’s shares have dropped precipitously since then.
After a serious of grim earnings calls and a lack of investor confidence, Twitter now trades at a meager $16 per share. The market cap is still a hefty $11.57 billion, yet the declining share value makes Twitter an attractive acquisition target.
Any company that had ever considered buying Twitter must feel like the company is now on sale. Shareholders, meanwhile, hope that some can come in and boost share prices by making the acquisition in order to return some value.
They Have Structural Problems
Almost half of Twitter’s senior staff left the company earlier this year. The high turnover at Twitter is somewhat notorious. This represents a problem for a company trying to attain growth and stability.
Whether this lack of continuity has a hand to play in Twitter’s problem can’t be proven, but the company has made some less-than-stellar decisions over the years. The most recent is their decision to invest $70 million in music streaming startup Soundcloud. That’s not the puzzling part. What’s puzzling is that they considered buying Soundcloud back in 2014 but decided against it, only to come back now and invest at a premium.
They Need to Monetize Better
Twitter is suffering two major problems that combine into one huge problem. User growth is slowing and users aren’t being sufficiently monetized. In a nutshell, Twitter is having trouble making money. Twitter isn’t able to collect the rich data that LinkedIn and Facebook can, and that’s a problem for the company’s bottom line.
When Microsoft bought LinkedIn, the underlying goal was to supplement Microsoft’s products (Word, Excel, etc.) with information about professionals. Twitter doesn’t have the work-focused audience that LinkedIn has; yet another company could make use of Twitter’s resources in a better way than Twitter could.
Buy or Pass?
With rumors flying that Twitter might be acquired, speculative investors need to decide whether to get on board or stay far away. Twitter has all the appearances of a troubled stock with little chance of recovery, yet the prospects of a purchase are as appealing as they are unknown. Twitter is ripe for a purchase, but prospective companies might be waiting to see just how low things can go.