Twitter (NYSE:TWTR) has long been a rumored acquisition target for larger Silicon Valley tech companies. Many analysts and prognosticators saw it as a good bolt-on acquisition to bring or enhance a mobile presence. As its valuation skyrocketed following its IPO, these talks lessened, but after losing around half of its market cap in the last year, I expect the murmurs to pick back up again.
Deciding whether to sell the company or keep it independent could be the most important question that the new Twitter CEO will have to tackle. It's interesting to think about even though newly appointed CEO Jack Dorsey, a company co-founder who's been interim CEO for a few months, hasn't indicated he's thinking about selling. There is no clear formula for a successful sale. Sometimes not selling hurts existing shareholders dearly. However, some of the world's great fortunes and greatest companies were built by holding on through the trying periods and focusing on the long term. Let's take a look at a couple of examples.
6 billion reasons to be regretful
Google attempted to buy Groupon in 2010 for the rumored sum of nearly $6 billion. CEO Andrew Mason was confident in the future prospects of his company and turned down the offer. For those who follow the public markets, the future fate of Groupon is well-known.
After exploding to over $26 per share after its IPO, it now trades in the mid-$3 range. With a market cap of under $2.5 billion, I think investors would leap at the opportunity to sell to Google for anything near the sum reportedly offered five years ago. Groupon my still be successful by focusing on fewer markets or by being acquired, but not selling in 2010 was a dear mistake. Not only is the company worth less than half of what was offered, but the S&P 500 is since up over 65%.
Facebook made the right choice
Suitors have attempted to purchase Facebook myriad times throughout its relatively short history. Multimillion-dollar offers were thrown at the young founders as early as 2004, and in 2006 Yahoo! tried to buy the company for $1 billion. Many would have leapt at the opportunity to make hundreds of millions of dollars in a few short years. Facebook remained private, IPO'd in 2012, and proceeded to become the fastest S&P 500 company ever to reach a market cap of $250 billion. Clearly, staying the course was the right move for Facebook and its investors.
I think Twitter is neither Groupon nor Facebook, but probably falls somewhere in between. If it's closer on the spectrum to Groupon, selling for a premium and moving on would be the best move. If it's closer to Facebook, it should stay the course, as these past few months have been a screaming buying opportunity for long-term investors.
Acquisitions can work
Sometimes an acquisition works out extremely well for both parties. Facebook purchased Instagram in 2012 for $1 billion and analysts at Citigroup now peg the company's value within Facebook at around $35 billion. I firmly believe that Instagram would not be nearly as successful as it is today had it not had access to the funding and other resources that Facebook provides, the most important of which is the luxury of focusing entirely on the business and growing the user base and not focusing solely on the bottom line.
Instagram plays another role in this article as a foil to Twitter. Instagram recently announced that it grew from 300 million to 400 million users in the past nine months. This is a staggering growth rate and shows a direct contrast to Twitter's less-than-satisfactory user growth rate.
The best outcome for current shareholders would be for Twitter to remain independent, grow out of its rut, and eventually become a $100 billion-plus business. The worst-case scenario would be for the company to struggle in the public markets and to eventually die on the vine. A solid middle-ground alternative might be to look for the best partnership, propose an acquisition, and eventually grow to become five, 10, or 20 times larger within the confines of a bigger company, a la Instagram. I'm eagerly waiting to learn what plans Twitter's new CEO has for the company.