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Analyst Blog

Shareholders of salesforce.com Inc. (CRM - Free Report) breathed a sigh of relief last Friday after the company’s Chief Executive Officer (CEO) Marc Benioff said that it will not be bidding for social media giant, Twitter Inc. (TWTR - Free Report) .

In an interview with The Financial Times, Benioff said "It's not the right fit for us for many different reasons”. He further added, "You're going to look at price, you're going to look at culture, you're going to look at everything." He said “In this case we’ve walked away".

It should be noted that shareholders and various activist investors have criticized the company’s plans of bidding for Twitter. The over three-week long drama has now finally come to an end.

It all started on Sep 23 when a report indicated that Twitter is in talks with several potential buyers and Salesforce is one of them. Benioff called Twitter “an unpolished jewel”. Also, the fact that he desperately wanted to compensate for the lost bidding war for LinkedIn Corporation (LNKD - Free Report) to Microsoft Corporation (MSFT - Free Report) further led investors to believe that Salesforce may go for the acquisition.

However, Salesforce investors weren’t much happy about the rumors as reflected in the negative movement in its share price on that day. Following the reports, Twitter shares gained over 21% while that of Salesforce dropped nearly 6% on Sep 23.

In our opinion, had Salesforce gone for Twitter, it would have been a risky deal. We believe that the buyout will not have been 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, the transaction may have led 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 would 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.”

Benioff’s recent stand brought some respite to investors last Friday as reflected in over 5% gain in Salesforce’s shares.

On the contrary, shares of Twitter plunged over 5% last Friday, as the social media company reportedly has no buyers now. Other contenders like Alphabet Inc. (GOOGL - Free Report) and The Walt Disney Company (DIS - Free Report) have already pulled out from the bidding race. The company, whose value was over $17 billion after its potential takeover rumor, has now come down to nearly $12 billion on the basis of its closing price as of Oct 14.

Currently, Salesforce and Twitter both carry 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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