Twitter shares rose about 2% to $138 Monday, on reports that the social media company has held preliminary talks with TikTok to buy the company.
TikTok is Chinese-owned and President Donald Trump has threatened to terminate TikTok’s U.S. operations if they aren’t sold to an American company by Sept. 15. The White House is in a broader battle with China over charges China routinely steals U.S. intellectual property and technology. This is a national security threat, according to the Trump administration. Trump wants TikTok’s U.S operations to be American owned.
Microsoft (MSFT) - Get Report has said it is in talks with the Chinese social media company. Microsoft shares fell 2% to $207 Monday.
It seems, based on the currently known facts, a Microsoft purchase would be far more feasible than a Twitter one.
Microsoft has a market cap of about $1.5 trillion. Some analysts say TikTok is currently worth between $40 billion and $50 billion. It is said to be a revenue-generating asset, although profitability is mostly an unknown for many U.S. investors and analysts. Microsoft would be entering a consumer-oriented social media business and would be competing against Facebook (FB) - Get Report and Snap (SNAP) - Get Report for user share and adverting market share, two companies with proven track records in the business.
While there isn’t an obvious synergy for Microsoft -- the deal would simply add another business to Microsoft’s broader portfolio -- the deal is totally financially feasible for the software giant. Microsoft has $136 billion in cash, roughly $63 billion in debt and an annual stream of earnings before interest, tax and non-cash expenses at $70 billion and growing.
But it’s a different story for Twitter.
First off, Twitter’s market capitalization is about $29 billion as of the date of writing. Secondly, Twitter has almost $9 billion in cash. Yes, it is true that Twitter only has about $4 billion in total debt, but the issue is that it would mostly likely have to raise a significant amount of debt to finance this acquisition if the price tag is truly where some think it is. And that’s even if the majority of the deal isn’t done with debt.
Even if Twitter divided a roughly $45 billion price between cash, debt and stock, the debt burden would be enormous, and the company would be using a huge chunk of its cash pile. And there is no guarantee that TikTok shareholders want to become Twitter shareholders. And adding tens of billions of dollars of debt to Twitter’s books for a company that may not be profitable would cause Twitter to have net debt in considerable excess of its roughly $1.5 billion EBITDA stream. And that’s before we even consider Twitter’s ability to maintain that projected profit stream.
“I think it makes very little sense for Twitter to be potentially trying to buy TikTok, whether it be the U.S. operations or the non-China operations,” Craig Huber, founder of and analyst at Huber Research Partners told TheStreet. “I question if they can even afford it.”
As for Microsoft, "We believe from a management and Board perspective this is a unique deal of a decade opportunity with a price tag that could easily be consummated,” wrote Wedbush Securities analyst Dan Ives in a recent note.
Ives said it seems unlikely Facebook or Google (GOOGL) - Get Report could buy TikTok because it would raise the eyebrows of Congress, which is already scrutinizing the advertising giants on antitrust practices.
But TikTok’s emergence can be a tailwind for Facebook even if it doesn’t acquire the company.
Analysts at Mizuho Securities wrote in a note that TikTok’s emergence prompted Facebook to launch Instagram Reel, a TikTok-like product. And Facebook’s mimic products have proven successful in the past, as seen by the company’s user share taken from Snap when Facebook launched Stories on its major platforms. Mizuho says TikTok has roughly 800 million monthly active users worldwide, with about 10% of that in the U.S. User growth was roughly 100% from the second half of 2019 until recently this year. Meanwhile, revenue was estimated at $500 million in 2019 as both users and revenue per users grows rapidly.
All in, a roughly $45 billion valuation represents a multiple of 2020 sales that shouldn’t be shocking compared to the valuations seen on the U.S. IPO market of late. This makes the valuation look not far from realistic and Twitter’s ability to pay up far from feasible.
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