What if... a China tech giant bought Twitter?

The flattening user growth of Twitter has investors worried but its travails could entice growth-minded China technology companies.

Twitter is going through tough times.

The micro-blogging site enjoys extremely good name recognition and is a boon to anybody who wants to keep track of minute-by-minute coverage of developing news, favourite events, or personalities.

But financially it’s been disappointing, a fact underlined by the company’s fourth-quarter earnings report on February 10.

While Twitter reported a 48% quarter-on-quarter rise to $710.5 million in revenues, largely due to its popular video advertisements, it was also the first three-month period in which active users did not grow.

Plus it’s continuing to lose money, ending up another $90.2 million in the red.

It’s some fall from grace. Twitter made its market debut in 2013 with a stratospheric $25 billion valuation but its share price has slid ever since, leaving it with a distinctly more earthbound valuation of less than $10 billion.

Twitter is desperate to build its user base and revenues. Co-founder and chief executive officer Jack Dorsey talked in January about ending the 140-character limitation on tweets, while the company wants to expand advertising.

However, the company’s seeming lack of focus on expanding into Asia in particular, an area that rivals such as Facebook are focusing on, has some onlookers concerned.

Yet for all its faults, Twitter boasts numerous advantages, not least hundreds of millions of users, plus that high brand recognition. Those factors command some value and potential acquirers include the US’s biggest technology players, with Google heading the pack.

But could Twitter’s travails entice China’s acquisition-hungry technology players to make a claim? It’s certainly possible.

Eastern exposure

For a start, both private and public Chinese companies are becoming increasingly aggressive in their desire to buy offshore market share, products, and services. These desires seem in some cases to supersede immediate thoughts about profitability.

Dalian Wanda demonstrated its intentions to grow internationally with its $3.5 billion acquisition of US movie studio Legendary Entertainment Group in January, Haier did so when buying GE’s white goods division for $5.4 billion in the same month, and China National Chemical Corporation has just agreed to buy Swiss seed-and-fertiliser maker Syngenta for a whopping $43 billion.

China’s internet and financial technology companies have been busy expanding and consolidating in the past 18 months. In October, for instance, online group buying companies Meituan and Dianping agreed to merge. Earlier, in February, taxi app companies Didi and Kuaidi also consolidated.

Several are now eyeing possible mergers and acquisitions overseas.

Twitter, with its proven base of users and that compelling brand recognition, would make for an enticing candidate.

Still, even at today’s depreciated share valuation, the sheer cost of acquiring Twitter means only a few Chinese technology companies could potentially consider it.

An obvious potential suitor might be Sina Weibo, which provides remarkably similar services to Twitter (Weibo even ended its 140-character limit on January 20). However the company looks too small as US-listed parent Sina has a market capitalisation of just under $2.9 billion, while Weibo, also US-listed, has a market valuation of $2.6 billion.

But purchasing Twitter might make more sense commercially and in terms of digestibility to one of China’s technology triumvirate: Alibaba, Tencent, or Baidu.

Conjuring an acquisition

For Alibaba, buying Twitter would be a snip.

Despite its poor share price performance in recent months it is still worth $320 billion today, having raised $21.8 billion through its initial public offering in 2014.

Its debt-to-equity ratio as of December was a meagre 0.26. So it could easily buy Twitter wholesale, if it wished.

Would it make sense to do so? Certainly, the sort of customer data Twitter could offer the world’s largest e-commerce company on its 300 million-odd, largely Western set of users would provide Alibaba with many global selling opportunities, particularly via its retail arm.

Additionally, Alibaba may be able to hatch potential growth plans by combining advertising on Twitter with Alipay, the online payment tool that has seized a roughly 80% share of China’s online payments market.

Alibaba has been willing to venture outside of China’s formal borders too, such as by buying Hong Kong newspaper the South China Morning Post for $266 million in December, but it has yet to make a large US acquisition. Twitter would offer it immediate heft in terms of consumer reach and information.

Wealthy benefactor

Tencent, Alibaba’s archrival in China, may find Twitter appealing too.

Its WhatsApp-like texting services covers similar ground to Twitter but on a person-to-person basis. Twitter would offer it the means to both build this out internationally.

Tencent too could easily afford Twitter. It reported a net profit of Rmb7.45 billion ($1.17 billion) for the third quarter of 2015 alone, up 32%, while its market cap is currently HK$1.28 trillion ($164 billion).

Tencent makes most its money by running messaging apps WeChat and QQ and by selling games and offering ads through them. Adding Twitter to this stable of services might well make sense.

Tencent has been quieter than its peers in terms of M&A.

But the company has funds available, having issued a $2.5 billion bond in April 2014, and then raised a further $2 billion via a bond issue in February 2015. Its debt-to-equity ratio was 0.5 as of September, so it could raise still more funds if needed.

White knight

Baidu, China’s third major internet player, would be the other option.

The company has been a keen M&A player, albeit mostly onshore in China. Bloomberg reported on January 20 that it had announced more than $2.7 billion-worth of deals over the previous two years and president Zhang Yaqin said the company intended to do more during an interview at the World Economic Forum.

It has also actively raised funds, launching a $1 billion bond in 2013, a $1.25 billion bond in June 2015, plus a $1.5 billion through a syndicated loan in November 2015. And with a debt-to-equity ratio of 0.67 as of September, it too has the capacity to raise more debt.

Yet Zhang said in the same interview that Baidu wasn’t seeking to take control of other companies and it appears to be mostly onshore-focused in its growth plans.

So that would make it the least likely of the three to conduct an acquisition, although if Twitter needed a partner rather than new owner, Baidu might yet be an attractive white knight.

For all their respective riches, China’s trio of internet leaders could decide that Twitter is too troubled for their liking. But if international growth and consumer access, not immediate returns, were the goal, surely it would make sense to buy a company with terrific brand recognition, hundreds of millions of users and a slightly dodgy but fixable balance sheet?

The prospects should leave M&A bankers atwitter, at the very least.  

What if… is a column that analyses unusual M&A ideas in Asia. These deals might not take place, but perhaps they should. 

¬ Haymarket Media Limited. All rights reserved.
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