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3 Reasons Why Disney Isn't Buying Twitter

By Rick Munarriz – Sep 27, 2016 at 9:12AM

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Why would Disney spend more on Twitter than it did on Pixar, Marvel, and Lucasfilm combined? Disney has more than 140 characters on its rolls -- and it doesn't need Twitter to get where it wants to be.

Image source: Disney.

There may be a mouse among the potential suitors vying for Twitter's (TWTR) hand. Sources are telling Bloomberg that Walt Disney (DIS -3.01%) is working with a financial advisor, evaluating a possible bid for the social media pioneer. 

It's easy to see why Disney is being played up as a potential buyer. Twitter founder Jack Dorsey sits on Disney's board. The media giant isn't afraid of spending billions on an acquisition. Disney's growth has also slowed, opening the door for a fast-moving addition.

However, there are some even bigger reasons why this is horrible idea. Let's go over why Disney investors are hoping that the Mickey Mouse company passes on the hashtag hottie.

1. It would be an uncharacteristic acquisition

It's true that Disney has spent billions apiece on Pixar, Marvel, and Lucasfilm. However, that was a combined $15.5 billion for three companies that have armed the media mogul with hundreds of iconic characters. 

Twitter -- at its current market cap of $16.4 billion -- would fetch even more, but it would provide Disney with far less. Disney's strength is amping up characters that it channels through its studios, cable channels, theme parks, and consumer products. Twitter is a self-contained ecosystem. Disney isn't suited to exploit Twitter the way it would the character-driven entities that it has already acquired.

2. Twitter would be dilutive to earnings for years

Let's assume that Disney can snap up Twitter at today's price, without a buyout premium. What would it mean for Disney if this were an all-stock deal? Twitter is trading at 40 times next year's projected earnings. Disney is trading for just 15 times earnings. In an all-stock transaction it would prop Disney's earnings multiple to 18 next year, assuming no significant realized savings. 

Twitter would be a dilutive snack for nearly all of the traditional media companies and most online players. The transaction wouldn't make a lot of sense for a publicly traded company that has to justify why it just bloated its valuation. 

3. Has Disney seen the seedy underbelly of Twitter?

Assuming that you're not prudish or at work, search for some of the raunchiest search terms that you can think of on Twitter. Once you're done rinsing out your eyes take a deeper dive into the black market for Twitter handles, followers, and other seedy trades taking place on its own platform. 

Disney doesn't have to take a family friendly stance with everything that it does, but does it really want the legal liability and brand-tarnishing prospects the next time that a social media-bullied teen ends it all or when a racist hashtag goes viral?

Disney hasn't shied away from cyberspace acquisitions. It snapped up parent Infoseek during the dot-com bubble days. It also snapped up Club Penguin. However, those were walled ecosystems that it could police effectively. That won't happen here.

Twitter is great. It's a much better platform than its stagnant user base growth suggests. It's a dynamic company that's just starting to tap its monetization potential. If it's genuinely up for sale then someone will genuinely buy it. That buyer just won't be Mickey Mouse. Disney stock would take a hit, and it's been taking too many of those lately.

Rick Munarriz owns shares of Walt Disney. The Motley Fool owns shares of and recommends Twitter and Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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