Not all aglitter at Twitter


  • News
  • Monday, 31 Oct 2016

Reuters

THE APPARENT lack of interest in Twitter Inc by potential suitors may force the social media company to consider a route anathema to aspiring tech startups: a major restructuring and cutting some its nearly 4,000 employees.

The popular but money-losing micro-blogging service spent aggressively on product development and marketing in recent years, betting that it could afford to post losses as long as it attracted new users.

But that growth stalled this year after it exceeded 300 million active monthly users, less than a fifth of Facebook Inc’s users and below Facebook’s Instagram.

Earlier this month, Twitter hired bankers to explore selling itself. Technology and media companies including Salesforce.com Inc, Walt Disney Co and Alphabet Inc’s Google looked at the company but ultimately passed on buying it.

“It’s going to take some bold moves here,” says David Hsu, a management professor at the University of Pennsylvania’s Wharton School, suggesting job cuts may be an option.

“It takes a very lean staff to maintain the core Twitter as an advertising and messaging platform,” he adds.

According to SunTrust analyst Robert Peck, Twitter could cut 10% of its workforce and save about US$100mil a year. Major layoffs, though, could hurt the company’s image in San Francisco, where the competition for engineering talent is fierce.

The company may look first at cutting sales and marketing, an area in which it spends more than twice as much as its rivals to earn each dollar of revenue.

“Twitter’s cost structure was originally built to grow into a much larger user base,” says Peck. “But with user growth stagnating, the company likely needs to reduce excess costs.”

In the first six months of this year, Twitter’s sales and marketing spending totalled US$473mil, or about 40% of its revenue. By comparison, spending in that area accounted for 19% of revenue at Yahoo, 15% at Facebook and 12% at Google-parent Alphabet, according to a Reuters analysis of quarterly financial reports.

Twitter also spends more, proportionately, than its peers on research and development. First-half spending on R&D accounted for US$334mil or 28% of revenue, compared to 24% at Facebook, 23% at Yahoo and 16% at Alphabet, according to a Reuters analysis.

Twitter could also reduce expenses by cutting products and moving some engineering positions to lower-cost overseas locations, analysts said. It may also need to reform its stock-based compensation plans when it hires new employees. Twitter doled out US$682mil in stock-based compensation last year, a large portion of its roughly US$2bil in annual revenue, which weighs on its profitability.

Private equity firms that examined a buyout of Twitter last year were turned off by the amount of equity-based compensation that would have to be paid out to employees in a deal, according to sources at the time.

If Twitter does not slash its costs, activist investors — who have aggressively pushed US companies in recent years for better cash management, leadership changes and new strategies — may see Twitter as an appealing target.

“Carl Icahn – Twitter needs you,” Bronte Capital’s John Hempton, an investor known for short-selling, or betting against stocks, wrote in a blog post earlier this month, referring to the well-known activist investor. Twitter “should be fixed with extreme prejudice by a disinterested outsider before it is sold again to a strategic buyer,” he added.

Companies often resist activist campaigns, and sometimes a proxy fight takes place, where the investor tries to replace board members with its own nominees. On rare occasions, companies invite friendly activists to get involved before they become hostile.

Last month, hard-drive maker Seagate Technology Plc invited ValueAct Capital in as an investor, selling a roughly 4% stake to the activist hedge fund. ValueAct received an observer board seat as part of the deal, but no voting power.

Twitter could also explore ways to bring in an outside strategic investor to assist in a turnaround. But finding the right company to invest in Twitter without it looking like a desperate move could be tricky, private equity executives say.

Whatever Twitter does, it needs to act fast. Former high-fliers Zynga and Groupon, which now trade at a fraction of their IPO, point to how quickly an Internet star can fade. — Reuters


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