February 25, 2021

Breakingviews: Twitter is an M&A target – Snap, not so much

by Breakingviews.

Social media companies are having an M&A moment. Some companies, like Twitter, are prime candidates for bids while others have structures and valuations that make deals harder. As with Microsoft’s interest in Pinterest shows, buyers may not be scared of overcoming hurdles, and a few little sweeteners could help.

Tech giants have been on the hunt over the past year. The Financial Times said earlier this month that the $1.8 trillion software firm Microsoft was eying Pinterest, the $53 billion image-sharing app. Oracle might take a minority stake in video app TikTok, a deal mooted last year that even piqued Walmart’s interest.

These popular companies pose acquisition challenges. Social media firms, with access to users’ data, have had their stocks surge, and as a result valuations have skyrocketed. Some companies, like Snap, are just too expensive. With an enterprise value almost 27 times its revenue, its multiple is almost three times higher than Microsoft.

Its market capitalization, almost 6% the size of Microsoft, makes it a drop in the bucket in terms of size. But then there is another problem: Triple-class shares give co-founders Evan Spiegel and Robert Murphy 99.5% of the vote, making it hard for any suitor to take control.

That’s a somewhat common issue among tech firms because founders are still in corner offices or nearby. Twitter, roughly the same size as Pinterest, bucks the trend. It has one class of stock and co-founder Jack Dorsey owns only about 2%. With an enterprise value of just 11 times revenue, it makes for a manageable deal.

Other companies are in between. Match Group, the $43 billion dating site, eliminated its dual-class structure and Barry Diller has just a 3.6% stake. And it has a more reasonable multiple of 16 times. Online vintage and craft marketplace Etsy has lost some of its flash, but it still has a devout following, giving it a multiple of about 14 times. And the founders of the 16-year-old company are long gone.

And then there is Pinterest. The San Francisco-based company trades at an enterprise value to forward revenue multiple of about 20 times, and the co-founders control almost 30% of the vote through dual-class stock. Those are bigger hurdles on both accounts. But the co-founders could be won over, perhaps, if Pinterest is kept separate and they maintain their leadership roles. If Microsoft succeeds, tech takeovers have little standing in their way.

Sources: Refinitiv, company filings. *Voting rights

Vincent Flasseur Breakingviews

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BREAKINGVIEWS

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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