Microsoft Corporation (NASDAQ:MSFT) has been floated as a potential bidder for Twitter Inc (NYSE:TWTR) and anyone holding MSFT stock should hope that it doesn’t happen. First of all, Microsoft has to be very careful about the hype.
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Salesforce.com, Inc. (NYSE:CRM), Verizon Communications Inc. (NYSE:VZ) and even Walt Disney Co (NYSE:DIS) are said to be interested in the social media network.
It’s difficult to see how TWTR is a good fit for any of these names. Who knows if the rumors are true? The idea that Twitter could become the object in a bidding war is just what dealmakers would like everyone to think.
The market is licking its chops over this potential takeout. And indeed, it would represent a merciful exit for anyone who has been a long-term shareholder. But the price was too high even before TWTR stock started rising on deal chatter.
Twitter’s market capitalization is up to $20 billion, even as it has a declining business. User growth is stagnant, which is death to a social media network. There’s a reason why Twitter stock has lost so much value since it went public. It was overpriced to begin with.
Anyone who offers a premium to TWTR’s share price just because it has had a good month is a fool. But that’s probably what’s going to be necessary to sew Twitter up. That would make it impossible for MSFT not to overpay.
More specifically for Microsoft, it already has a major acquisition in the works. It struck a $26 billion deal for LinkedIn Corp (NYSE:LNKD) last summer. The argument that LNKD’s analytics make sense in the context of Microsoft Office 365 makes sense. But it still needs to execute, and a distraction like TWTR would greatly increase the odds of MSFT stock screwing up.
TWTR Doesn’t Add Anything to MSFT Stock
It’s also not clear why Microsoft would even want Twitter. How does it fit in with existing lines of business? If it wants TWTR for messaging in Office 365, it would probably be better off buying Slack.
And if MSFT it wants Twitter because it thinks it can get user growth moving again, good luck with that. To its credit, TWTR has been creative in addressing its lack-of-growth problem. The deal with the NFL certainly hasn’t been bad for the brand, but it has hardly been a savior. If anything, it has so far been a dud.
Microsoft would need to top that idea — as well as Twitter’s other content plays — and it’s not a content company. Why would Microsoft succeed where TWTR — and the NFL — failed?
Finally, the biggest knock against Twitter is that it has proven to be more niche than anyone thought. It’s stuck at about 300 million active users, but it needs six times that number to be mentioned in the same breath as Facebook Inc (NASDAQ:FB).
That’s not going to happen. TWTR has topped out because the real story is that younger millennials don’t care about Twitter. They have Snapchat, Instagram and Kik. Mention TWTR to a kid and you’re likely to get a smirk. They lump it in with Facebook. It’s for “old people.”
MSFT is not going to revive Twitter. The brand is what it is. Maybe it can scoop out some synergies, but it’s more likely that it will have to pour investment into the business.
Microsoft got lucky a decade ago when Yahoo! Inc. (NASDAQ:YHOO) escaped its grasp. The best thing for MSFT stock would be for TWTR to get away too.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
