Twitter — perched out on a limb

Twitter is a hectic online town square, busy with debaters bitter about Brexit, mid-westerners watching live games of American Football, and with Donald Trump, a US presidential candidate who spends the small hours attacking his rival on the platform.

But the company itself is looking lonely and left out. After weeks of potential buyers examining the messaging platform — from Alphabet, formerly know as Google, to big names in media and telecoms such as 20th Century Fox and Verizon — interest appears to have crumbled, if not died out.

On Friday, became the latest company to rule out a bid, with chief executive Marc Benioff telling the Financial Times: “In this case we’ve walked away. It wasn’t the right fit for us.”

Salesforce had been the only serious contender left in the race after Twitter opened itself to takeover offers, two people briefed on the sale process said. The sale process is virtually dead, said a person close to Twitter’s senior management. 

The home of the 140-character message has been struggling with slowing user growth since shortly after it went public in late 2013, when it commanded a value of $18bn compared to less than $13bn today. Twitter has never made a net profit and its losses narrowed by less than 10 per cent last year. Its shares tumbled after its last earnings report in July, when it warned that its advertising business may grind to a halt or even decline in the third quarter.

Last year, the board made what it hoped would be a big change by bringing back co-founder Jack Dorsey as chief executive, replacing Dick Costolo. But a year in, Mr Dorsey’s tweaks to the product and media partnership deals, orchestrated by chief financial officer Anthony Noto, have not yet revived user growth — and projections for advertising revenue are beginning to wobble.

What is Twitter’s future, if the little birdie is forced to fly alone? And are there any other flocks it could join? Here are the possible outcomes:

Twitter fails to attract buyers

The most likely option for now.

Investors once hoped Twitter would be the next Facebook. But as Facebook has grown its userbase to 1.7bn monthly active users, Twitter has languished with 313m users logging on to the site each day. If it is to go it alone, Twitter needs to accept it is a smaller platform and cut costs, argues Robert Peck, an analyst at SunTrust Robinson Humphreys.

1. Disappointing revenue outlook
2. Microsoft pays $26bn for LinkedIn
3. Weak advertising projected
4. Google and Salesforce hold talks to acquire Twitter
5. Shares plunge as bid interest wanes

“Twitter is a great asset, it is a fantastic property. The only thing changed here is it is not on the path to a billion users or even 500m. It will be 300m to 350m users, so shareholders will demand it gets its cost structure in line,” he says.

Mr Peck estimates that Twitter could cut 10 per cent of its workforce, with many going from sales and marketing, where the company spent 39 per cent of its revenue last quarter, significantly higher than Facebook, which spent 14 per cent of revenue.

But Mr Peck admits, it is hard to cut pay or further shake morale with redundancies in a competitive talent market like the West Coast technology industry. “Imagine if you were a top-notch engineer, you could have your choice of Snapchat pre-IPO [initial public offering], Facebook or Google or Uber or you can work at a sputtering turnround in Twitter,” he says.

Twitter could also shrink by abandoning projects which are not core to the main messaging platform, from selling companies it bought in previous deals such as MoPub, the mobile advertising exchange it paid $350m for in 2013, to Vine, the six-second video app it acquired in 2012. It could also stop investing in its developer platform Fabric. Twitter already cancelled its annual developer conference Flight in favour of smaller events this year.

But even slimmed down, Twitter might not survive alone. Its third-quarter earnings at the end of the month are not expected to show much progress, but the fourth quarter should have the benefit of engagement around the US election and revenue from its deal showing National Football League games.

“In the fourth quarter, we will really start seeing all these events having a positive impact on both user growth and user engagement. And if that doesn’t happen, you’re going to have a huge amount of backlash against the board and management to do something,” says Youssef Squali, an analyst at Cantor Fitzgerald.

Another buyer emerges

Other buyers which have not been previously mentioned may be lured from the woodwork, say people close to the investment banks working with Twitter, who are looking beyond Silicon Valley and New York media circles to perhaps unlikely acquirers, such as companies in China.

Analysts have also discussed the possibility of a bid from IBM or even Microsoft, despite it having just acquired LinkedIn, the professional social network, in June.

A management buyout

Mr Dorsey may be looking for alternatives to an outright sale of the company he co-founded 10 years ago, hunting instead for financial support for a management buyout.

Brian Wieser, an analyst at Pivotal Research, declares the idea “not implausible”.

“He would not have enough on his own, but if you cobble together a few similarly wealthy investors and a few large asset managers, I don’t think it is impossible,” he says.

Cantor’s Mr Squali says he knew of at least one wealthy individual and a private equity firm who had taken a look at Twitter.

An activist shareholder takes a stake

Analysts are divided over whether an activist investor is likely to target Twitter, because it is unclear exactly what they could demand. If a deal was close, the investor could try to push the board to sell.

An activist could also try to unseat Mr Dorsey, who controversially has held on to his position as chief executive of his other company, payments start-up Square. However, it took the board months last year to settle on Mr Dorsey as their preferred chief executive and it is not clear who else would have the skills and a suitable turnround plan to take on Twitter.

“I’m not sure it is in Twitter’s best interest to open that can of worms,” says Mr Peck.


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