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Twitter Needs a Bastard Buyer

Posted On October 12, 2016 11:58 am
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Twitter (TWTR) shares have buffeted, including single sessions of a both a 20% up and 18% down move after word it is seriously considering a sale surfaced two weeks ago. The potential suitors who subsequently lined up ranged from obvious mega-cap candidates such as Disney (DIS), Google (GOOGL) and Microsoft (MSFT) to dark horse Salesforce (CRM). All but the latter have walked away.

Word had it they balked not only at the price, but at the prospect of integrating and monetizing the ubiquitous but chaotic media platform into their larger business models.

While Twitter suffers from the unfair comparisons to behemoth Facebook (FB), no-one doubts what a valuable property it is; it’s already massive and is growing revenue at a healthy clip. The problem is despite its scale and healthy revenue it still loses money. And that seems to be the challenge, not just for potential acquirers but for Twitter itself: how to improve or even “transform” the service to help it grow further and become profitable.

Twitter management, both past and present, certainly carry much of the blame for its failures and this, rather than the platform, is where changes should be made. So while everyone else is thinking about what strategic partner makes sense, James Hempton of Bronte Capital puts forth what Twitter really needs is a financial buyer. And one who, as he says, is “a bastard” willing to cut costs and heads with a ruthless eye on the bottom line.

Hempton makes a compelling case – at this point in its life cycle and product development Twitter should not be burning cash like some dot.com start up, nor should it still be trying to figure out what its business model is. Hint, it needs to embrace its role as the live event news feed.

I love and use Twitter and would hate to see disappear due to mismanagement. I think Hempton’s case for a for a financial rather than strategic buyer is compelling. Here is the complete article.

Twitter is wildly addictive. This is well known and there are people who check twitter more obsessively than anyone checked email.

Twitter is also a chaotic world full of trolls, useless information, porn-spam and videos of kittens.

It is also – as anyone cares to notice – for sale.

The gossip – and I have no reason to doubt this – is there are two factions on the Twitter board:

  • The CEO Jack Dorsey who wants to run the company

and

  • The board, who – sick of pointless losses and running out of money – wants to sell it.

This leads to probably the most leaky sales process I can ever remember – with almost daily rumors about who is interested and who is not interested. The current rumor mill says all the “strategic buyers” are not interested.

This company should be and probably will be bought by an aggressive financial buyer. One that will fire Jack.

twtr-income-statement-image-10-12-16

Here is what to notice. Revenue has gone up very nicely – from $664 million to $2.2 billion and is still increasing. And costs have gone up commensurately. Losses seem stubbornly stuck at half a billion per annum. That is real money – just burnt – and burnt by an already established business.

In other words, costs have gone up by $1.5 billion give or take something. That is billion with a b.

Now if costs were rising that fast and the service were noticeably improving with engagement growing, then you could be tolerant. Making money is far less important in a growing tech company than increasing your relevance and the moat surrounding your business (Amazon is the leading example of a company which increases the moat every day). The short-hand for that thinking is ‘revenue follows relevance’.

But as a pretty dedicated tweeter (with almost 20 thousand followers), I have noticed almost no changes in Twitter that improve my user experience. It is almost impossible to find out what they spend that $1.5 billion extra per annum on. I gather there are some improvements in the monetisation side but this is just a website – and it does roughly what it did in 2012 – but spending well over a billion dollars more to do the same thing (from my perspective the marginal improvement I am seeing is fewer failed-to-load pages… but that is it).

Twitter has become a parody of bad Silicon Valley management – the sort of management that existed in the dot-com boom, where quite literally burning shareholder funds was considered a mark of innovation.

The main difference between this and (say) Pets.Com is that underneath is a business that should be salvageable – and should make pot-loads of money. After all, if they raised costs by $1.5 billion per annum without achieving jack-shit then costs should be able to be controlled. And if that’s possible then Twitter as an LBO works on the back of an envelope at these prices.

Why a financial buyer not a “strategic buyer”

The news of the day is almost all of the strategic buyers (other big tech companies) have pulled out of the bidding process. There is good reason why that should be the case.

If you run Salesforce.com for instance, your main agenda should be on growing your business in a disciplined fashion. They are still in the stage of building relevance. That requires friendly, well directed management willing to let staff have their little well-directed flights of fancy (rewarding, of course, those fancies that grow the business).

But Twitter is past that. Somewhere near half a billion dollars of costs need to be taken out almost immediately. And that involves firing people and being a general tough-bastard. It’s inevitable anyway – because Jack Dorsey burning half a billion dollars per year isn’t a sustainable business. The cash eventually runs out.

The problem is if you mix this with a Salesforce.com or similar company, it will be really hard to take costs out in a disciplined fashion without upsetting the culture of the home company. Instead this should be fixed (with extreme prejudice by a disinterested outsider), before it is sold again to a strategic buyer.

Or – in summary: the best bastards are from Wall Street. And this needs a Wall Street bastard.

Carl Icahn – Twitter needs you.

About author

Steve Smith
Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.