Summary
- According to a recent report Google is attempting to buy out Twitter.
- The deal sounds reasonable in light of Google's growing cash position and the long-term value potential of Twitter.
- Google has to use the cash pile somehow, and buying out Twitter could make for a nice addition to the company's portfolio of businesses.
- Furthermore, Twitter's biggest stakeholder is a former Google executive, and the recent departure of the CEO adds fuel to the rumors.
- I continue to reiterate my buy recommendation. It has been a tough year for Twitter shareholders, but buyout talks could drive the stock price considerably higher.
There are rumors circulating of Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) intent to buyout Twitter (NYSE:TWTR). At first, the thought process seems pretty logical, but again we're still in the rumor stage and nothing has been confirmed.
Google could nail it at a relatively reasonable price in the $50 to $60 range. Now if Twitter were trading at $50 to $60, Google would then have to pay $75 to $80 per share. According to Bloomberg, announced deal premiums are 50% in 22% of cases. Given the high profile nature of a potential Twitter acquisition, it's safe to assume that the deal premium will exceed 50%.
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Source: Bloomberg Research
So, if Google wants to take action, it should take action now. Twitter is significantly cheaper from its all-time highs. Furthermore, I don't anticipate the stock to decline any further as the recent resignation of Dick Costolo put a floor underneath the stock price.
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Source: Amigobulls
Silicon Valley M&As can be a little different from other industries, as one of the most prevalent tactics of boards unwilling to sell is to stay silent. Even if an offer sheet for a reasonable amount were to surface, the board of directors will not tell the remaining shareholders unless the offer is really compelling and the board intends to take the offer. However, the firm attempting to swallow the company has the opposite incentive. The acquiring firm wants to pay less and get the deal done as quickly as possible. So, to do this, they spread rumors of a potential merger in advance. They then layer the minefield so that the opposing board has to eventually capitulate on the back of institutional shareholders wanting a quick exit. Money today is better than money in three to five years.
We saw a similar story play out with Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) in 2008. Top executives at Microsoft leaked that they were going to buy out Yahoo. However, Yahoo was able to maintain its independence at the detriment of Yahoo shareholders as the market crash hammered them. However, Yahoo had already sowed the seeds of a promising future by owning a huge chunk of Alibaba. Knowing today's Microsoft, it would have held on to 40% of China's biggest e-commerce platform. So, in hindsight Ballmer was right, he should have bought Yahoo at all cost, but he was right for the wrong reasons. And he walked away from one of the most lucrative deal tables of all time. Owning 40% of Alibaba would have added $75 billion to Microsoft's valuation at the time of Alibaba's IPO.
So, historically speaking, sometimes big deals do work, and in the case of Twitter, it might work even if the valuation is a bit expensive.
Twitter has become significantly cheaper from its all-time highs and is in the midst of a CEO transition. Perfect timing for Google as it has tons of cash sitting on its balance sheet and it's sitting idly. Over the next five years Google will have $150 billion in cash, short-term equivalents and liquid assets (according to my estimates and assuming it doesn't make a major acquisition). Google doesn't have many other options. Absorbing another tech company of its size would garner scrutiny of antitrust regulators, and buying back shares at its currently high valuation isn't the best use for its cash.
Also, Twitter's biggest shareholder is Chris Sacca, a former Google executive. Google won't have much trouble winning over the company's biggest shareholder given Chris has deep Google and Twitter roots. Perhaps Dick knew about this potential deal, and that's a contributing factor to why he left. Perhaps he doesn't want to work for Google.
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