Every so often, Wall Street financial firms and investment banks blindly announce acquisition rumors as if they are facts. This mainly occurs in the tech and biotech sectors, where M&A rumors run amuck. And while these claims are often unfounded, investors nonetheless pile into the alleged "buyer" and "seller" companies. For example, only two months ago Wall Street gossiped nonstop about the idea of Salesforce.com (CRM) selling itself to Microsoft (MSFT) or Oracle (ORCL). However, since the rumor gained traction in April, all involved parties remain independently owned.
Not surprisingly, Wall Street is once again drooling over a potential acquisition target. However, this time the rumor involves two of the world's biggest, and most popular, B2C companies: Google (GOOGL) and Twitter (TWTR).
This rumor first gained traction a month ago after early Twitter investor Chris Sacca mentioned in an interview that a Twitter acquisition by Google would foster tremendous synergies. Since then, investor speculation has skyrocketed. And while an acquisition of this magnitude appears highly unlikely, Sacca may nevertheless be correct in his analysis. Let’s take a look at how both companies could benefit from an M&A deal.
Firstly, acquisitions are particularly popular at Google. Since its 1998 foundation, Google has acquired 170 companies, spending more than $24B on its 10 largest acquisitions alone. These purchases include big names like Motorola (MSI), YouTube, IoT company Nest Labs, and online advertising specialist DoubleClick.
Although $24B is a significant amount of capital to spend, let alone on 10 acquisitions, purchasing Twitter will likely cost $30B-$35B (a 25-35% premium). Twitter’s market cap currently hovers around $24B; this valuation is incredibly depressed because Twitter's share price has drastically fallen from its 52-week high of $55.99 (it currently trades at $35.72). However, Google's cash reserves total $64B; hence, the acquisition is fiscally plausible.
Financials aside, Twitter’s current struggles, and the two companies' similarities, make for an interesting acquisition proposal. As I mentioned previously, Twitter’s stock price has fallen due to disappointing revenue growth, declining user acquisitions, lowered guidance, and a tumultuous chief executive situation. After years of criticism, which has only grown louder, Twitter CEO Dick Costolo has finally resigned. As such, Jack Dorsey, Twitter's co-founder and current CEO of Square, will serve as the company’s interim chief executive. Although the change in command is a step in the right direction, as we suggested in a previous article, there’s no telling how quickly Twitter’s new leader will be able to fix the company's inefficiencies.
Even with its instability, Twitter remains an attractive takeover candidate. It excels in an extremely attractive sector that Google has long struggled to conquer: social media. After losing more than half its Google Plus users since 2013, Google officials have all but pulled the plug on the company's social network. By acquiring Twitter, Google could immediately solve its social media void.
The two companies already announced a friendly partnership in which Google's search results will display related Tweets; clearly Google is interested its platform. Moreover, Twitter announced that it will incorporate Google’s DoubleClick service into its social media service. These partnerships represent Google’s version of a test drive to determine if Twitter resembles a spiffy Audi or standard Volkswagen.
Altogether, there are a number of practical factors that favor a Twitter acquisition. However, as with any potential M&A, there are numerous, and complicated, facets related to the deal. Only time will tell whether or not these two tech powerhouses merge. Above all, investors should pay attention to how both companies’ stock prices react to news concerning M&A activity, partnership announcements, and/or rival interests.