Should Google Buy Twitter?

With its massive cash flow, should Google acquire Twitter?

Jamal Carnette, CFA
Jamal Carnette, CFA
Jun 20, 2015 at 11:19AM
Technology and Telecom

Source: Twitter.

For those following the tech space, Twitter (NYSE:TWTR) has to be the most confounding company. On one hand, the microblogger provides an inherently valuable service that millions depend upon daily for news and real-time updates. On the other hand, there are significant concerns about slowing user growth (particularly among monthly active users), leading to questions about future monetization, along with worries about bloated stock-based compensation expenses that have stopped the company from becoming consistently profitable on a generally accepted accounting principles earnings basis.

As a result, Twitter has been pilloried in the business media and characterized as a company that can't shoot straight. That is perhaps a bit unfair, as the company did grow revenue 74% year over year in its last reported quarter. Nonetheless, those concerns recently culminated with the announced resignation of CEO Dick Costolo. When compared to other social-media companies such as Facebook and LinkedIn and the greater Nasdaq 100, you can see Twitter's disappointing post-IPO underperformance.

TWTR Chart

TWTR data by YCharts.

More recently there has been a growing sentiment among analysts that Twitter isn't quite ready for Wall Street's relentless quarterly focus. Pacific Square Research founder Herb Greenberg summed up the growing zeitgeist in a LinkedIn article succinctly titled, "Why Twitter Should Not be Public."

While it would not exactly be putting the genie back in the proverbial bottle, discussion has centered on Twitter being acquired by Google (NASDAQ:GOOGL) (NASDAQ:GOOG). Here's how both companies could benefit from such a deal.

For Twitter, the best benefit is anonymity
The benefit for Twitter, in addition to the takeover premium that shareholders would receive, would be much-needed breathing space. If the acquisition were structured and reported in the same manner as Google's YouTube deal, the company would not need to report revenue or profit separately. This would allow Twitter to take a long-term focus on monetization, instead of growing 74% and (still!) facing a skeptical Wall Street for falling slightly short of forecasts.

Consolidated financial statements would also make Twitter's stock-based compensation expenses more palatable for shareholders. Last fiscal year, these expenses amounted to 45% of Twitter's relatively small revenue base. When added to Google's larger revenue haul, the combined total would be decidedly less and easier for GAAP-focused investors to accept. Finally, if a post-merger Twitter did have operational shortfalls, Google's focused management should be able to extract value.

For Google, it's growth
On the other hand, Google could gain by a tuck-in acquisition -- Twitter is still growing while Google's growth has slowed in a maturing market. As a comparison, Google grew its top line by 12% from $15.4 billion in first-quarter 2014 to $17.3 billion to first-quarter 2015. To be fair, that's amazing growth at that scale, but it was notably slower than prior growth due to falling cost-per-click rates.

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While Twitter's 74% year-over-year growth wouldn't have substantially lifted Google's growth rates during this period, giving the companies differing revenue scales (Twitter's first-quarter 2014 and 2015 reported revenue figures were $250 million and $436 million, respectively), the differences in growth rates would likely become worthwhile if they continue. Google would also benefit from synergies via cost savings and future cross-monetization efforts.

Of course, this is only a rumor and might never happen. However, Google has $59 billion in cash on the books (roughly three times Twitter's current market cap) as the company has been outright miserly about dividends and stock buybacks. At some point, investors will ask management to put its low-return capital to work or to return it to shareholders. Buying Twitter could be a good way for Google to enrich long-term investors.