No partner in sight, Twitter faces tough
solo choices
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[October 21, 2016]
By Liana B. Baker and Jim Finkle
SAN FRANCISCO/BOSTON (Reuters) - The
apparent lack of interest in Twitter Inc by potential suitors may force
the social media company to consider a route anathema to aspiring tech
startups: a major restructuring and cutting some its nearly 4,000
employees.
The popular but money-losing micro-blogging service spent aggressively
on product development and marketing in recent years, betting that it
could afford to post losses as long as it attracted new users.
But that growth stalled this year after it exceeded 300 million active
monthly users, less than a fifth of Facebook Inc's users and below
Facebook's Instagram.
Earlier this month, Twitter hired bankers to explore selling itself.
Technology and media companies including Salesforce.com Inc, Walt Disney
Co and Alphabet Inc's Google looked at the company but ultimately passed
on buying it.
The aborted sales process - and the company's strategy as an independent
company - will be back in the spotlight when Twitter reports earnings on
Oct. 27. The company declined to comment.
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"It’s going to take some bold moves here," said David Hsu, a management
professor at the University of Pennsylvania's Wharton School, suggesting
job cuts may be an option. "It takes a very lean staff to maintain the
core Twitter as an advertising and messaging platform," Hsu said.
According to SunTrust analyst Robert Peck, Twitter could cut 10 percent
of its workforce and save about $100 million a year.
Major layoffs, though, could hurt the company's image in San Francisco,
where the competition for engineering talent is fierce.
BIG SPENDER
The company may look first at cutting sales and marketing, an area in
which it is spends more than twice as much as its rivals to earn each
dollar of revenue.
"Twitter's cost structure was originally built to grow into a much
larger user base," said Peck. "But with user growth stagnating, the
company likely needs to reduce excess costs."
In the first six months of this year, Twitter's sales and marketing
spending totaled $473 million, or about 40 percent of its revenue. By
comparison, spending in that area accounted for 19 percent of revenue at
Yahoo, 15 percent at Facebook, and 12 percent at Google-parent Alphabet,
according to a Reuters analysis of quarterly financial reports.
Twitter also spends more, proportionately, than its peers on research
and development. First-half spending on R&D accounted for $334 million,
or 28 percent of revenue, compared to 24 percent at Facebook, 23 percent
at Yahoo and 16 percent at Alphabet, according to a Reuters analysis.
Twitter could also reduce expenses by cutting products and moving some
engineering positions to lower-cost overseas locations, analysts said.
It may also need to reform its stock-based compensation plans when it
hires new employees. Twitter doled out $682 million in stock-based
compensation last year, a large portion of its roughly $2 billion in
annual revenue, which weighs on its profitability.
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The Twitter logo is displayed on a screen on the floor of the New
York Stock Exchange (NYSE) in New York City, U.S. on September 28,
2016. REUTERS/Brendan McDermid/File Photo
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Private equity firms that examined a buyout of Twitter last year were
turned off by the amount of equity-based compensation that would have to
be paid out to employees in a deal, according to sources at the time.
ACTIVIST IN THE WINGS?
If Twitter does not slash its costs, activist investors - who have
aggressively pushed U.S. companies in recent years for better cash
management, leadership changes and new strategies - may see Twitter as
an appealing target.
"Carl Icahn - Twitter needs you," Bronte Capital's John Hempton, an
investor known for short-selling, or betting against stocks, wrote in a
blog post earlier this month, referring to the well-known activist
investor. Twitter "should be fixed with extreme prejudice by a
disinterested outsider before it is sold again to a strategic buyer," he
added.
Companies often resist activist campaigns, and sometimes a proxy fight
takes place, where the investor tries to replace board members with its
own nominees.
On rare occasions, companies invite friendly activists to get involved
before they become hostile. Last month, hard-drive maker Seagate
Technology Plc invited ValueAct Capital in as an investor, selling a
roughly 4 percent stake to the activist hedge fund. ValueAct received an
observer board seat as part of the deal, but no voting power.
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Twitter could also explore ways to bring in an outside strategic
investor to assist in a turnaround. But finding the right company to
invest in Twitter without it looking like a desperate move could be
tricky, private equity executives said.
Whatever Twitter does, it needs to act fast. Former high-fliers Zynga
Inc and Groupon Inc, which now trade at a fraction of their initial
public offering prices, stand as startling evidence of how quickly an
internet star can fade.
(Reporting by Liana B. Baker in San Francisco and Jim Finkle in Boston;
Additional reporting by Greg Roumeliotis in New York; Editing by Eric
Effron and Bill Rigby)
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