The Twitter-Google Chess Match

Ari Kuchinsky writes about the stock market, technology and often the intersection of the two.

The acquisition of Twitter by Google is the ultimate strategic buyout. We know that Twitter turned down a $10 billion buyout offer from Google sometime in early 2011. There have also been other overtures made over the past several years by Google, Facebook and Microsoft. Surprisingly, Twitter is still independent. Why hasn’t Google paid up with all of that cash on its balance sheet? How could Twitter turn down $10 billion when the company isn’t worth anywhere near that based on earnings or even projected earnings (1999 style)?

Google owns search but it has one hole—real-time search. Twitter owns real-time search but its ability to monetize without a partner is limited. The synergy will be unlocked when Twitter is packaged within Google search and monetized through Adwords. When we read the headline announcing Google’s acquisition of Twitter, I think the price will be substantially higher than $10 billion. I also believe that Twitter will be Google’s next YouTube! The price will sound expensive early on, but it will end up being a great strategic acquisition for Google.

What makes Twitter valuable? Twitter is about following your interests and major events in real-time (as opposed to following family and friends). For me, Twitter is a one-stop shop covering college football, the stock market, technology and real estate. I can instantly find out what is going on in my areas of interest by clicking on the Twitter app.

Twitter does have an image problem. It is filled with bots and spam accounts. There are a ton of people still famously tweeting “I had a great breakfast this morning.” But for those of us that understand Twitter, the bots, spam and useless tweets are paths that are easily avoided. When you visit a city, you don’t go from the airport to the bad part of town. Twitter is the same way. Visit the attractions you want to see, and avoid the underbelly. A few rules and you’ll be fine. Don’t play the game of following people back simply because they follow you. Never follow anyone that doesn’t have a profile picture. Ignore all tweets telling you how to get more followers.

So who are all these people filling your stream with valuable links on Twitter? My former classmate Clay Travis wrote a post about Twitter from a writer and journalist’s perspective. Writing is becoming less about the platform and more about the individual. Twitter is allowing the content providers (the writers) to build their personal brand and to create their own networks. The fact that journalists and writers are buying into Twitter is what makes it valuable to me and it is what makes Twitter valuable generally. I get to pick and choose the jewels in each of my areas of interest instead of having to sift through an entire website. In a nutshell, Twitter is a revolutionary platform for breaking news and following your interests. I think the adoption of Twitter by the masses is still coming. Eventually, everyone will get it.

When will this chess match end and how might it play out? It seems that we have a chess match because Twitter knows it is worth a lot to Google and that Google can’t let Facebook or Microsoft buy it. Yet, it is difficult to justify paying $20 billion (or whatever the number will be) to buy a company that doesn’t earn much. This creates a deadlock.

The Facebook IPO could be a catalyst to get things moving. When I wrote this post back in June, Google had a market cap of $163 billion. On a relative basis, Google seemed and still seems like a real bargain compared to the much more speculative Facebook at these valuations.  Google is now valued at $213 billion and approaching all-time highs. The stock has really moved since June. I believe the Facebook IPO is at least a factor.

If Google buys Twitter in a stock deal, its currency is now much higher than it has been over the past several years. Facebook going public with a $100 billion valuation puts pressure on Google too. Facebook will soon have the advantage of offering highly liquid publicly traded stock (at an obscene valuation) to the owners of Twitter. Microsoft could make a move, but I’m not sure if Microsoft (or anyone else) believes that packaging Twitter with Bing would be enough to cause users to adopt Bing. It is especially unlikely since Google has solidified itself in mobile search with the Android platform. Microsoft missed its chance to be a player in search and I believe the price is too high for them as a strategic buy. We also know that Google has by far offered the most for Twitter in past conversations between the companies. Why would this change now?

The end game for Twitter is a strategic buyout. It is hard to see it playing out any other way. The Facebook IPO is changing the landscape a bit. Will 2012 be the year that we wake up to Google buying Twitter?

About Ari:

Ari has been watching stock prices since he bought one share of duPont in the fifth grade and has been a computer geek since he started visiting and running bulletin board systems (BBS) in the late 1980s. Professionally, Ari is a commercial real estate attorney in Austin, Texas and holds a law degree from Vanderbilt and a business degree from the University of Florida. The opinions expressed by Ari are in his personal capacity and are not associated with any other person or entity.

Follow Ari Kuchinsky on Twitter:  @arikuchinsky

Tags: $GOOG, $MSFT