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The Twitter premium

The hidden cost of buying Twitter

One pricey reason Twitter is scaring away buyers

We’re now more than a year into Jack Dorsey’s attempted resurrection of Twitter, and it’s not going well. The stock has lost more than a third of its value since its 2013 IPO, and the company is exploring a sale.

But it doesn’t look like anyone’s biting right now. Google, Apple, Disney and Salesforce had all been reportedly kicking the tires in recent weeks, but Bloomberg reported on Saturday that Twitter canceled “a board meeting with outside advisers on a sale,” suggesting the process is on life support, if not dead.

What’s more, Marc Benioff, CEO of marketing software firm Salesforce, is taking a beating from institutional shareholders for even considering a deal for Twitter.

While Twitter’s anemic user base and flattening revenue growth would be enough to scare off many potential acquirers, there’s something else that makes Twitter a tough pill for any buyer to swallow. Stock-based compensation, or the amount Twitter pays its employees in shares of Twitter, is a startlingly high share of the company’s revenue.

This compensation, designed to incentivize employees to stay at Twitter, becomes a liability that will be passed on to whoever acquires the company.

According to data from the S&P Global Intelligence unit, Twitter spends 26 percent of its revenue on employee stock options. Among 190 U.S. tech companies that make more than $1 billion in revenue, Twitter has the second-highest stock-based compensation as a share of revenue behind enterprise security firm Palo Alto Networks.

By itself, this figure doesn’t mean a whole lot. Google, Apple, Amazon, and other tech heavyweights routinely rank among the S&P 500 companies that spend lavishly on stock options for their employees.

But those companies can afford to do that. Google mints money on search, Apple created the iPhone profit monster, and Amazon has wrapped its tentacles around everything from online shopping to cloud computing. And in order for the titans of Silicon Valley to keep their talent from jumping ship, they compensate people with a lot of stock.

If Twitter is on the block, the dramatically high amount of stock that Twitter pays out to employees as a way to retain talent could dissuade potential buyers.

That’s because who ever might buy Twitter would likely have to pay a premium to all people who hold Twitter stock, a common part of corporate acquisitions sometimes called a “control premium.” And as CNN has reported, Twitter employees are “waiting for their stock options to vest with the hope of a better financial return from an acquisition.”


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