Microsoft-LinkedIn deal ignites Twitter speculation

YouTube and Google.
Instagram and Facebook.
Tumblr and Yahoo.
LinkedIn and Microsoft.
Twitter and… ?

In the relentless push toward consolidation in technology and social media, Twitter, the social networking site that allows users to send and receive short messages, or tweets, has been the perennial bridesmaid. But this week's megadeal between Microsoft and LinkedIn has renewed speculation on Wall Street that Twitter needs to attract a suitor or risk being overtaken by ever-larger competitors.

"If current trends continue, it's inevitable that Twitter will get acquired," Robert Peck, managing director and internet equity analyst at SunTrust Robinson Humphrey, told me this week. Peck has long considered a Twitter deal likely, and he renewed that prediction last week even before the Microsoft-LinkedIn deal was announced. This week numerous analysts piled on to the notion.

Investors seem to agree: At one point this week, Twitter shares were up 17 per cent on deal speculation, pushing the company's market capitalisation to nearly $11.5 billion.

But investors expecting a big deal at a LinkedIn premium in the next few months may want to think twice.

Given the similarities between LinkedIn and Twitter, it's not hard to see why shareholders would be betting on a sudden windfall. Until Monday's announcement, both companies' stocks were trading at relative bargain prices, both down about 42 per cent in the last six months. (Before this week's rally, Twitter shares were barely half their $26 initial public offering price.)

Both offer global reach and a large number of users: 433 million registered members worldwide for LinkedIn and 310 million active monthly users for Twitter (the numbers aren't directly comparable because not all LinkedIn members are active users.)

Apart from Facebook and several Chinese social networking companies, Twitter has the largest user base among independent social network companies, according to Statista. (Statista estimates LinkedIn's active monthly users at 100 million.)

Twitter solidified its place as a hub of the global news conversation during and after last weekend's massacre at a gay nightclub in Orlando.

That kind of reach is extremely difficult to replicate in an increasingly crowded digital world. "We continue to believe that Twitter remains a platform with massive opportunity," said Ken Sena, managing director and consumer internet analyst at Evercore.

Mark Mahaney, technology analyst at RBC Capital Markets, agreed: "They've got a great brand, a large platform and a unique value proposition."

A megadeal with a much bigger partner would give Twitter "scale," which is becoming all-important in a Silicon Valley now dominated by a handful of tech giants.

As the LinkedIn chief executive, Jeff Weiner, put it in his memo to employees explaining the deal, "Imagine a world where we're no longer looking up at tech titans such as Apple, Google, Microsoft, Amazon and Facebook and wondering what it would be like to operate at their extraordinary scale - because we're one of them. Imagine a world where we're not reacting to the intensifying competitive landscape - we're leading it with advantages most companies can only dream of leveraging."

For Jack Dorsey, one of Twitter's founders and its chief executive, the right deal wouldn't even mean giving up his leadership role or independence. Following the lead of Alphabet and Facebook, which have given considerable autonomy to the large operations they've acquired, Microsoft promised Weiner that he could run LinkedIn as a "fully independent entity."

The Microsoft chief executive, Satya Nadella, "had me at 'independence,'" Weiner wrote in his memo.

But if the reasons for a Twitter deal seem so obvious and compelling, why hasn't it happened yet? The fact is that Twitter faces some unique challenges, and just because it's a big social media site and prominent Silicon Valley denizen doesn't mean it's going to attract a suitor. Yahoo has been openly shopping itself for months, and would-be buyers haven't exactly been beating down its door.

In April, Twitter reported disappointingly flat user growth and worse-than-expected revenue, and said it was still operating at a substantial loss under generally accepted accounting rules. Investors fled, driving the stock to new lows, and media critics piled on. The Slate technology columnist David Auerbach went so far as to say: "Twitter as we know it is over."

For at least some of the all-important (to advertisers) millennial users, that may well be the case. Jacob Shiansky, 24, who was visiting Manhattan from South Carolina, told me this week that he couldn't remember his Twitter password and hasn't visited the site in six months.

"It's too much business and political promotions rather than a social media site," he said. "If you want to see Trump's ridiculous tweets, you can go on Facebook or CNN. You don't have to bother with Twitter."

He said his friends feel the same way. "It's all Facebook, Instagram and Snapchat," he said. "They're quick and they're fun. You don't have to waste your time typing."

I can't say my own Twitter use has been all that prolific, even though I sometimes use it to comment on my column and to recommend stories by other journalists. But I've stopped following some people who spew what seems a constant stream of drivel. Days go by when I don't look at the site.

User engagement has become an increasingly important metric for advertisers, because it enhances ad exposure and gives the site more information about its users, enabling it to target ads better.

On that front, Twitter is a clear laggard. Users spent an average of nine minutes a day on all of Yahoo's sites, two minutes on LinkedIn and just one minute on Twitter, according to recent data from comScore. Facebook reported last quarter that its users were spending, on average, 50 minutes a day.

"We regularly survey advertisers and ask them to rank internet platforms," Mahaney, of RBC Capital Markets, said. "Google ranks first, Facebook second and Twitter is somewhere down the list. That's been true for every survey," he said.

LinkedIn had the advantage of a clearly defined user base - business professionals - that fit neatly into Microsoft's current strategic focus. "This deal is all about bringing together the professional cloud and professional network," Nadella said in a recent report in The New York Times.

Twitter is increasingly seen as a source of news and information more than user interaction. That makes it a natural fit for a news organisation seeking to extend its digital footprint, and rumours that News Corporation was interested briefly buoyed the stock this year. (News Corporation denied the reports and no bid materialised.)

Few traditional media companies, though, are big enough to swallow Twitter at its current market value. News Corporation, one of the richest, has a market capitalisation of just under $7 billion.

Peck and Mahaney cited Alphabet as the most likely buyer. The two companies already have many ties: Several Twitter executives used to work at Alphabet's Google, tweets appear in Google search results and advertisers can buy ads on Twitter through Google's DoubleClick bid manager.

Google's own social networking effort, Google Plus, hasn't caught on. Google undoubtedly has the size and scale to absorb Twitter.

But Alphabet's founders have said repeatedly they don't want to create content. So if Twitter is increasingly seen as a real-time news and content site rather than a social media network, it doesn't fit into Google's strategic objectives. Those, of course, could always change.

Both Google and Facebook have reportedly looked at Twitter and passed. (Neither company would comment on those reports. Jim Prosser, a Twitter spokesman, also declined to comment for this column.)

But Facebook has in many ways emerged as Twitter's biggest competitor. A deal would raise antitrust issues, and it's not clear why Facebook would pay a premium for something it could largely build on its own.

From a strategic standpoint, the cable media giants Verizon Communications and Comcast might make sense. Both are big enough, both are already content providers and both have shown interest in expanding their digital presence. But it's not clear either company has the expertise to solve Twitter's major problems, which are far afield from the cable network business.

A lot of this week's deal talk seems more like wishful thinking among Twitter investors desperate for a LinkedIn-style exit strategy. That may be slow in coming. Even Peck of SunTrust doesn't expect a deal before 2017 at the earliest, because it's still early in Dorsey's latest turnaround effort.

Others are even more skeptical. "I can see the argument for it, but I'm not betting on a deal," Mahaney said. "There just aren't many logical buyers."

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