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.
The aborted sales process - and the
company's strategy as an independent company - will be back in the spotlight
when Twitter reports earnings on Oct. 27. The company declined to comment.
"It’s going to take some bold moves
here," said 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," Hsu said.
According to SunTrust analyst Robert Peck,
Twitter could cut 10 percent of its workforce and save about $100 million a
year.
Major layoffs, though, could hurt the
company's image in San Francisco, where the competition for engineering talent
is fierce.
BIG SPENDER
The company may look first at cutting sales
and marketing, an area in which it is 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," said 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 totaled $473 million, or about 40
percent of its revenue. By comparison, spending in that area accounted for 19
percent of revenue at Yahoo, 15 percent at Facebook, and 12 percent 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 $334 million, or 28 percent of revenue, compared to 24 percent at
Facebook, 23 percent at Yahoo and 16 percent 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 $682 million
in stock-based compensation last year, a large portion of its roughly $2
billion 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.
ACTIVIST IN THE WINGS?
If Twitter does not slash its costs,
activist investors - who have aggressively pushed U.S. 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 percent 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 said.
Whatever Twitter does, it needs to act fast.
Former high-fliers Zynga Inc and Groupon Inc, which now trade at a fraction of
their initial public offering prices, stand as startling evidence of how
quickly an internet star can fade.
(Reporting by Liana B. Baker in San Francisco and Jim
Finkle in Boston; Additional reporting by Greg Roumeliotis in New York; Editing
by Eric Effron and Bill Rigby)
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