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Salesforce Plunges on Heightened Twitter Buyout Speculation

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Investors have always reacted positively to acquisition announcements made by, Inc. (CRM - Free Report) . This means that they saw the possibility of value creation in all those deals. However, their reactions to the recent rumors of the company considering bidding for social networking operator, Twitter Inc. (TWTR - Free Report) have been rather harsh.

It should be noted that Salesforce had lost about 6% of its value on Sep 23, when the speculation news first surfaced. The stock dived another 6% yesterday on heightened concerns that the company might end up buying the struggling micro-blogging company.

Investor concerns were sparked off by a The Wall Street Journal (WSJ) report that quoted Salesforce’s Chief Executive Officer Marc Benioff calling Twitter an “unpolished jewel”. The WSJ reported that Benioff apparently views Twitter as having tremendous prospects in advertising, e-commerce, which bode well for Salesforce's next stage of growth.

The stock was down over 8% at one point after the report. However, it pared some losses after Benioff, during a CNBC interview with Jim Cramer, was seen neither directly confirming nor denying the possibility of a deal. During the interview, he said “We look at everything, and we don’t buy most things, and we haven’t agreed to buy that company”, per WSJ.

Why Benioff Might Go for Twitter?

As Benioff has not denied the possibility of a deal, we believe that he is exploring various ways in which the integration of Twitter will open newer avenues for growth.

The leading customer relationship management platform provider missed taking over LinkedIn Corporation earlier this year. Therefore, Benioff may now be eyeing Twitter’s valuable data for getting insights, especially sentiment analysis, which can greatly enhance its offerings. In addition, Salesforce will also get access to a vast number of databases, which it can use as a marketing tool.

Twitter has a database of over 313 million monthly active users. Its users include several influential people who use the platform to connect with their followers as well as various companies who use it as a marketing tool.

Therefore, we believe that, Salesforce may be looking at integrating its marketing, service and sales cloud software with Twitter’s vast database. This may help the company in providing its clients a proper understanding of their customers and also help in increasing engagement.

Apart from this, Twitter’s attractive valuation may also be another reason for Salesforce to express its interest in the company. At yesterday’s closing price, the company’s market value was about $17.4 billion, way below its all time high value of over $40 billion attained in Dec 2013, just a month after its IPO.

What’s Making Investors Worried?

As reflected from the share price movement, investors apparently believe that the buyout will not be a strategic fit for the company, as Salesforce already has a deal with Twitter to use its database for lead generation. So, it makes no sense to acquire assets to which it already has access.

Furthermore, 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 had earlier 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.”

Bottom Line

According to media reports, Salesforce is not the only potential suitor. There are several other companies including The Walt Disney Company (DIS - Free Report) , 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 the social media platform.

But surely, looking at investors’ reactions, as of now, it’s definite that if Salesforce engages in any bidding war to acquire Twitter, its share price will fall dramatically.

Currently, Salesforce carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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