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Twitter Still Doesn’t Feel Like a Standalone Company, But Where Does the Exit Lie?

Posted October 25th, 2011 by Andrew Goodman

Like many of you, I’m a pretty active user of Twitter. I understand its value in that it reaches a great many people every day.

It’s raised a great deal of money by now — enough to keep it going for as long as it wants. Recently, CEO Dick Costolo made some remarks to the Wall Street Journal about the company’s future in the context of its current lofty secondary market valuation of approximately $8 billion.

As much as we might be curious about technology, advertising models, user experience, and “awesomeness,” what still hangs over all of this speculative industry talk is the reality that Twitter’s fate will be decided largely by investors and founders who are only in this to sell. Partnerships, ad platform development, and even potential future IPO talk are all simply means of solidifying a certain selling price – presumably over $10 billion.

To emphasize that point: Twitter was founded by serial entrepreneurs who have had past successes with companies like Blogger and who are currently curious about new ventures (for example whatever might be developed under the aegis of Obvious Corp.). The investors who currently have an interest in the company’s future are mostly high-powered VC’s who do not go into plays like this so they can operate companies for the long term. They enter so they and their investors can exit, ideally inside of 5-6 years. The current top execs at the company (and those who have essentially left but remain there in title) are simply not credible if they claim that their goal is to build this standalone service into something great in its own right.

I see Twitter as similar to YouTube. They *could* IPO, develop the company further, and stay independent, but, um, they can’t really and they don’t plan to.

There’s where it gets tough. Assuming that exit is still the primary (if unstated) goal, Twitter needs to have a “home” in the form of an interested, deep-pocketed acquirer. (See our take on this in the 2009 piece “Yes, Twitter’s Business Model is to Be Acquired, and Yes, It Will Be“.)

Who’s that?

There are few “platforms” in the world upon which to rest a service as beloved as Twitter. Google as always has to be considered #1. Along with all the other obvious reasons (despite Steve Yegge’s choice of terminology, Google remains the #1 ‘platform’ in the world, unless you count Facebook). The exit scenario is interesting to all of us for a couple of reasons. First, if Twitter and their management want to exit, there needs to be a meeting of the minds and valuations with an acquirer, and there aren’t many of those. At the right price, many companies would love to own Twitter. But the price is where the argument starts. Second, as users will we need to envision a different Twitter? Arguably, services like Skype and YouTube have not changed enormously since acquisition and have not been entirely subsumed into their parents, and that’s nice for us. But depending on who they acquirer is, this will affect how you feel about Twitter, to be sure.

At this stage, there are maybe four potential acquirers for Twitter — companies that could be argued to have platforms that are sturdy enough to “rest” Twitter on, and pockets deep enough to overpay enough to satisfy the financial objectives of the current dominant players on Twitter’s board.

  • Google. Certainly, this is still the obvious play. They have an ambitious (to use an understatement) social media development strategy in progress now with Google+. Google+ has many advantages and some strong raw user numbers, but it lacks vitality. Past partnerships with Twitter for data feed sharing have resulted in rather standoffish and stalemate-ish outcomes between the two companies. And at the same time, there’s no way Twitter is going to disrupt Google’s dominance. It’s invested tiny amounts in search technology so it can search itself, but that doesn’t mean it’s worth aspiring to anything broader than organizing tweets. Given Google’s ridiculously strong financial position, it has the means to pay a bit more than it has to or should. So that bodes well for a potential deal. Antitrust and privacy concerns? Of course those always come into play. It’s strange how little they came into play in the past when companies like AOL and Yahoo were ascendant. So in the end, regulation can’t likely block these kinds of acquisitions. Nor should it. Odds: 3-2.
  • Apple. Twitter is talking up an Apple partnership, and certainly Twitter’s main strength down the road appears to be in terms of widespread mobile usage. Indeed, it’s tailor-made for mobile. So as Android and Apple’s mobile strategy face off, Apple seems like the leading other contender to acquire Twitter. That’s obviously good for Twitter, so they can ignite a bidding war between two very jealous rivals. Here’s the problem: Google’s business model relentlessly revolves around monetization through ads. Apple’s does not — not even close. That lowers the odds greatly. Odds: 5-1.
  • Microsoft: Microsoft has been aggressive in acquiring companies like Skype and building services like Bing, and it has invested a significant amount in Facebook. It is doing all of these things to appear connected to the online world, the “cloud,” etc. Whether or not it is particularly good at making money from all these attempts to show it “gets it” (in fact, Microsoft loses great sums in its online division), it has a pattern of heavy involvement in the space. For this reason alone, it’s a stronger contender than Apple, even though on the surface it looks like it should be in third place in the Twitter Sweepstakes. Odds: 4-1.
  • Facebook: Facebook is involved in an even more elaborate and audacious flip of its own, or it may very well go public and try to continue taking over the world. Absorbing something this large, with a far less developed ad model and revenue stream, would simply be too disruptive for the founder and the investors to agree on. Facebook may indeed enter a pre-IPO process of housekeeping (and quiet period) in the next year, which would essentially knock them out of the Twitter sweepstakes for upwards of a year. Odds: 15-1.
  • Private equity & institutional money. There certainly is a lot of money looking for places to park in the world, and only so many digital media darlings with household names. Buying something like this for $11 billion so it can be flipped for $12 billion might not make a whole lot of economic sense, but given the interest certain pension fund managers might have in getting invited to exclusive retreats and founders’ yachts, you never rule anything out. 20-1.

For Twitter, the final piece of the puzzle may be in creating a sense of urgency. Given that — upon reflection — Google is actually much more likely to acquire Twitter than the others, that urgency may be difficult to manufacture. The familiar Google vs. Microsoft scenario is probably urgent enough to create action, though.

The other spur to action may be continued concern at Google that Google’s social strategy needs to turn the corner faster. A Twitter acquisition would bring instant credibility to Google; this is social sharing credibility it doesn’t currently enjoy, despite all its efforts to date.

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