Tuesday, October 11, 2016

Twitter Is The New Yahoo, So Expect A Long And Bumpy Ride

Board and CEO reportedly at odds about sale of once-hot property with growth issues — sound familiar?


By Therese Poletti
MarketWatch
October 11, 2016

A service that originally found millions of fans as part of a new computing paradigm eventually hits a ceiling for the number of users it can attract, leading to a flagging stock, questions about its raison d’ĂȘtre, and larger companies considering a merger to add eyeballs or brand cachet.

Yep, that’s Twitter Inc. TWTR, -11.54% But it is also very similar to the story of Yahoo Inc. YHOO, +1.62% and investors who have jumped in on Twitter the past couple of weeks might want to consider how long (and how many failed efforts) it took to find a Yahoo deal that still isn’t quite done yet.

Like Yahoo, whose board was pressured by an activist hedge fund to sell its core business, Twitter’s board appears to have mixed feelings about the sale. Chief Executive and co-founder Jack Dorsey is said to not be 100% behind the move to sell the company, much as Yahoo CEO Marissa Mayer and Yahoo’s board appeared to have diverging interests when Mayer continued to work on and tour her plan to turn Yahoo’s core business around as the board pursued a sale.

“We think the CEO would like to see whether many of his recent initiatives can work in turning around Twitter user and engagement growth before seeking strategic alternatives,” SunTrust analyst Bob Peck wrote in a note last week, referring to Dorsey and the latest turns in the Twitter soap opera.

Dorsey faces board and investor skepticism about his turnaround plans for the company, just like Mayer. Dorsey’s dilemma is also parallel to that of Yahoo co-founder Jerry Yang, who, like Dorsey, returned to the CEO helm at his creation to reignite growth.

Yang returned to Yahoo in 2007, and was a key force inside the company rallying against an unsolicited $44.6 billion offer from Microsoft in 2008 for the internet pioneer. That deal, as we all know, never happened, with Yahoo seeking a higher price and Yang later stepping down under pressure from activist investors like Carl Icahn who wanted a deal with Microsoft.

Dorsey has said nothing publicly about acquisition interest, but he did reportedly write an internal memo rallying the troops that “we can do this” as an independent company. Meanwhile, reports that potential acquirers such as Walt Disney Co. DIS, +0.00% , Alphabet Inc. GOOGL, +1.68% GOOG, +1.40% and Salesforce.com Inc. CRM, +5.91% will not take the plunge have sent Twitter stock plunging in the past two sessions.

Yahoo’s ultimate deal to find a buyer happened roughly eight years after Microsoft’s first entreaty, with a $4.8 billion deal announced with Verizon Communications Inc. VZ, +0.54% in July. In between, several acquisition rumors raised investors’ hopes and caused Yahoo stock to swing.

The current hype surrounding Twitter’s possible acquisition feels as though it could end like Yahoo’s Microsoft moment, though Salesforce is an interesting wild card. While the deal makes no sense for his company, Chief Executive Marc Benioff has made public comments supporting Twitter, similar to Verizon’s CEO publicly discussing the possibility of buying Yahoo earlier this year. Fresh from a rejection by LinkedIn’s board, which preferred Microsoft’s all-cash $26 billion offer, Salesforce faces the same difficulties in finding cash for a Twitter deal, and many investors do not see Twitter’s hefty market cap as worth it.

Other media conglomerates could still have the idea under consideration, but it’s clear that for all its brand recognition and hundreds of millions of users, Twitter is not as hot a property as one might expect. One hope is for another parallel with Yahoo: Periscope, its live video service, would have to find breakout growth like Yahoo’s stake in Alibaba Group Holding Ltd. BABA, +2.27% which is not part of the Verizon deal.

That kind of growth for Periscope could take a while, though, and Twitter’s value could plummet similar to Yahoo’s core offering in the years between Microsoft’s failed bid and Verizon’s current effort. So, as this round of acquisition rumors winds down, Twitter investors should take note of Yahoo’s long and winding road as a hint to what could lie ahead if Dorsey and the board don’t make a deal now.


Article Link To MarketWatch: