Insight Bite

Acuity’s Richard Baker ruminates on Twitter’s place in the digital media boom, and what this could mean for the UK’s tech scene.

The speculation over Twitter’s fate has reached fever pitch, seemingly inching ever closer to a potential sale. Indeed, press speculation over alleged approaches from likely suitors has been the single most contributing factor to Twitter’s share price performance this year – up another 22% on the latest rumours.

Google and Salesforce are allegedly at the dining table, with the likes of Microsoft and Verizon also ready to indulge, although the latter two would seemingly have their metaphorical mouths full with the LinkedIn and Yahoo integrations respectively.

However, one thing is for sure, Twitter is just the latest item on the menu for global technology consolidators seeking to rapidly expand and evolve away from their core platform propositions. Digital Media accompanied by a side of Big Data analytics capabilities seems to be the order of the day.

I am personally following the recent sector developments with avid interest having previously advised on the sale of both SecondSync, the social media analytics software vendor, to Twitter and of Branded 3, a Search Engine Optimisation business, to St. Ives. As a Partner at Acuity I am able to provide my unique insight into M&A trends within the digital transition arena – an area which has seen some very strong valuations to date as global consolidators, across the size and scale spectrum, seek to capitalise upon the latest online communication trends.

We are seeing large global tech consolidators who are prepared to pay big bucks to augment end user numbers and maximise online, especially mobile, revenue opportunities. A perfect example is Facebook’s acquisition of WhatsApp for $19bn two years ago, which certainly set a precedent.

Indeed, in recent times there have been a spate of lofty valuations of various size and scale, whether start-ups such as Slack, a San Francisco based workplace communications tool, recently valued at $3.8bn, or more mature ventures such as web and social media data analytics vendor, AddThis, acquired by Oracle for almost $150m earlier this year. Other examples include:

Yahoo’s acquisition of online fashion community, Polyvore, for $200m;

Time Warner’s acquisition of online fantasy sports platform, FanDuel, for $275m; and

Twitter’s acquisition of TellApart for $550m, a marketing technology company providing retailers and e-commerce advertisers with unique cross-device retargeting capabilities through dynamic product ads and email marketing.

Is it all good news?

The key to any acquisition is alignment of expectations on both sides of the table. Whilst the opportunity to enter into new exciting, complimentary growth markets with visible synergies is key, none of this matters if the price does not justify the return on investment. The aforementioned high profile transactions have set an undoubted valuation precedent and we have seen expectations permeate through the market, such that there is still a significant amount of deal flow which has been scuppered by lofty vendor value expectations.

In the case of Twitter, it is struggling to augment its user base, its shaky finances and repeated unsuccessful attempts to fully commercialise potentially lucrative adtech revenue streams, which would suggest that a sale at current prices (c. 4x revenues or a premium on a market capitalisation of $13bn) making little sense, especially as the share price jumps on every takeover rumour.

However, just because it doesn’t make sense doesn’t mean it won’t happen

Online autonomy, a clear mobile strategy, maximising end user numbers, all underpinned by advanced analytics capabilities are the big currencies for today’s large tech companies, and they are prepared to aggressively pursue acquisition opportunities to tick these boxes.

Both Microsoft and Salesforce hotly contested the LinkedIn auction; perhaps Salesforce now sees an opportunity to get even with Twitter. Data is key, used primarily for advertising but also making the wheels spin for all kinds of business intelligence and sentiment modelling. Today Salesforce lacks capability here. Twitter, of course, possesses a wealth of real-time data from its 300 million plus monthly active users – similar to WhatsApp at the time it was acquired by Facebook.

In terms of timing, it is not clear why Google would be willing to buy Twitter now, rather than wait for it to get cheaper, but as an acquirer it makes a lot of sense. Twitter would provide a social media platform allowing expansion of advertising, desktop and mobile capabilities. In addition, Google has cash to burn, as does Microsoft, and it’s pretty difficult to make a WhatsApp-sized $19m work efficiently in the bank at present. Twitter could plug a significant return on investment quandary in one swoop.

So what of the UK – should we write off the UK’s chances as a truly global tech hub?

You may have noticed that there is very much a US flavour to all the aforementioned tech protagonists. Indeed venture capital is the lifeblood of any start-up ecosystem, and there’s more of it in Silicon Valley than anywhere else. The UK’s appetite for risk is typically much lower; it is harder to attract specialist talent to what seems like a risky venture.

It’s a big gamble throwing money at embryonic ideas when you know most are destined not to succeed. However, almost $60bn was spent doing just that in the US last year. The mind-set is positive: to invest “only” a few million for a small shareholding in a company that may or may not hit the big time. More often than not, they don’t but the ones that do can reach the stratosphere. Also those fabled entrepreneurs who have “made it” tend to stay very active in the tech world and frequently reinvest large proceeds into the Next Big Thing.

Equally US VC’s are generally prepared to move faster, with fewer restrictions and less bureaucracy, resulting in an appetite to take a bigger gamble. There are exceptions of course, but generally the British outlook is much more risk averse.

The UK isn’t presently in the same ballpark when it comes to being able to consistently incubate successful technology companies. However, I do believe it could be one day. London in particular has a significant advantage that a number of other cities just can’t replicate – offering a potent mix of significant key funding and technology players operating in close proximity…

Perhaps all it needs is a change of mind-set?