salesforce.com, Inc. (CRM - Analyst Report) is on a buying spree this year and if rumors are to be believed, the company is going to make its biggest ever acquisition. Last Friday, media reports indicated that Twitter Inc. (TWTR - Analyst Report) is in talks with several potential buyers and Salesforce is one of them.
Why is Salesforce Keen On Twitter?
If the buyout rumors are true, this could well be Salesforce’s Chief Executive Officer (CEO) Marc Benioff’s effort to compensate for the lost bidding war for LinkedIn Corporation (LNKD - Analyst Report) to Microsoft Corporation (MSFT - Analyst Report) . Notably, of late, Salesforce has been trying to explore options in the social-networking space to give a boost to its business.
We believe that the lost LinkedIn opportunity may have a negative impact on Salesforce over the long run. As per Bloomberg, Salesforce, which is currently the market leading customer relationship management platform provider, had expected the LinkedIn acquisition to provide it access to “vast trove of data on workers around the world to bolster tools that help customers close sales deals.”
Twitter’s vast 313 million monthly active users makes it a lucrative takeover target. Its users include world’s several influential people who use Twitter to connect with their followers as well as various companies who use it as a marketing tool.
Apart from this, Twitter’s attractive valuation may also be another reason for Salesforce to express its interest in the company. At Friday’s closing price, the company’s market value was about $16 billion, way below its all time high value of over $40 billion attained in Dec 2013, just a month after its IPO. Moreover, at Thursday’s closing price, the stock was down approximately 19.5% year-to-date.
However, Salesforce investors, it appears, aren’t much happy about the rumors as reflected in the negative movement in its share price. Following the reports, Twitter shares gained over 21% while that of Salesforce dropped nearly 6%.
A Risky Deal
We believe that the buyout will not be a strategic fit for the company as Salesforce already has a deal with Twitter to use its vast database for lead generation. So, it makes no sense to acquire assets to which it already has access.
Furthermore, we are worried that the transaction may lead to either massive dilution of shareholders’ value or a huge debt burden. At the end of second-quarter fiscal 2017, Salesforce had cash and cash equivalents and marketable securities of $1.174 billion. Therefore, to complete the acquisition, the company will have to either use stocks or borrow a hefty amount.
Additionally, financial news provider, Bloomberg, pointed out that if Salesforce succeeded in acquiring Twitter, “[it] would be buying a consumer-facing service with unique challenges -- such as monitoring hate speech and fighting state censorship -- that a corporate software company rarely handles.”
According to media reports, Salesforce is not the only potential suitor. There are several other companies which are in conversation with Twitter. But there has been no concrete development to determine which company is interested the most and their plans for Twitter.
In our opinion, Twitter will be most suitable for companies like Comcast Corp. or 21st Century Fox Inc., as its business is somewhat similar to a media company.
It may also prove to be a good choice for Alphabet Inc. (GOOGL - Analyst Report) , which has platforms like YouTube under its fold. YouTube could be the go-to video host on Twitter. Users can sync their accounts for a seamless experience. Also, YouTube comments could combine individual tweets.
But surely, as of now, it does not make sense for Salesforce to be in a bidding war to acquire Twitter.
Currently, Salesforce carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>