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3 Reasons Google Inc Shouldn’t Acquire Twitter Inc

This article was originally published on Fool.com

WASHINGTON, DC — Is Google (NASDAQ: GOOG.US) (NASDAQ: GOOGL.US) planning to buy Twitter (NYSE: TWTR.US) soon? Recent rumours suggest that it’s possible, based on reports that Twitter has hired Goldman Sachs to fend off takeover attempts.

This isn’t the first time we’ve heard about Google’s interest in Twitter. Back in 2009, Google was reportedly in late-stage negotiations to buy Twitter for $250 million. In early 2011, rumors suggested that Google, Facebook (NASDAQ: FB), and several other companies offered to buy Twitter for around $10 billion. This January, new reports claimed that Google could make an even higher offer.

Source: Pixabay

The logic behind a Twitter takeover is simple. Google’s previous social networking efforts — Orkut, Buzz, and Google+ — have been dwarfed by Facebook’s 1.39 billion monthly active users (MAUs). Facebook is capitalising on that lead with its own video-hosting platform, location-based services, payments platform, and other services. It’s tethering more third party sites and apps to its ecosystem with single sign-ons, which collect data for targeted ads. Since that growth threatens Google’s ecosystem of ads and services, it desperately needs a social solution to widen its defensive moat against Facebook.

If Google acquires Twitter, which now has a market cap of $34 billion, it would be its largest acquisition ever. But in my opinion, it’s not worth that lofty price tag. Let’s take a look at three reasons the deal would be a huge waste of money for Google.

1. It’s expensive
Twitter’s revenues more than doubled year over year to $1.4 billion in 2014. However, it reported a net loss of $645 million, up slightly from a loss of $578 million in 2013.

Last quarter, Twitter reported a net loss of $125 million, which was mostly attributed to $177 million in stock-based compensation. But surprisingly, those hefty bonuses still couldn’t prevent Twitter’s chief operating officer, chief financial officer, head of news, and head of engineering from all leaving within the past 15 months.

Twitter stock is also overvalued at current prices. Twitter trades at 24 times sales, compared to Facebook and LinkedIn‘s P/S ratios of 18 and 14. This means that Twitter could be bought at a cheaper price if fundamental gravity kicks in.

2. Stagnant user growth
Twitter’s MAU growth has slowed down considerably over the past year. Back the fourth quarter of 2013, MAUs rose 30% year over year to 241 million. But in the fourth quarter of 2014, MAUs only grew 20% to 288 million.

A recent survey by Pew Research Center also found that just 23% of American adults use Twitter, placing it in fifth place behind Facebook, LinkedIn, Pinterest, and Facebook’s Instagram, in that order.

In January, Twitter disclosed that 24 million of its users have never tweeted, meaning that they could be robots, third-party apps, or spam accounts. Moreover, there’s a huge gray market for sales of fake followers, which are created by algorithms and sold by the thousands to attention-seeking Twitter users. These problems damage Twitter’s reputation as a social network and advertising platform.

3. Google already has decent access
Twitter previously prevented Google from listing tweets in its search results. But in February, Twitter signed a deal with Google to bring tweets back to Google searches. Twitter stated that the deal would encourage new users to sign up, that it could monetize the landing pages with ads, and that it would generate additional data revenues by sending the tweets to Google.

However, the deal arguably benefited Google more than Twitter. The partnership lets Google users bypass Twitter’s revenue-generating News Feed and jump straight to the tweet. Therefore, Twitter users who regularly use Twitter’s internal search engine could start using Google to simultaneously scour tweets and other websites. Google’s search results will also be enhanced by real-time tweets, which will boost the relevance of its targeted ads.

Since that deal basically gives Google access to some of Twitter’s best features, there’s no point in buying the entire site.

Twitter’s not worth it, Google
Google’s 10 largest acquisitions in history had a combined price tag of $24.5 billion. With an acquisition premium, Twitter could cost $40 billion to $65 billion. That’s a whopping price tag for a company with no profits, high valuations, and stagnant user growth. Google certainly needs to push back against Facebook in the social media space, but buying Twitter just isn’t the answer.

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Leo Sun owns shares of Facebook. The Motley Fool UK owns shares of Google (A shares) and Google (C shares).