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Twitter (TWTR) shares were down 20% on news from the site Recode that Alphabet (GOOGL), Apple (AAPL) and Disney (DIS) were all backing out of respective bids. This leaves Salesforce.com (CRM) as the only legitimate potential suitor.
Twitter has been the center of endless gossip since rumors leaked that the company was putting itself up for sale. Twitter had allegedly wanted to finish a deal before it reports earnings later this month.
The thing to remember is that all of this is speculation based on rumors and innuendos. Twitter has never publicly made its intentions completely clear.
It’s also not the first time Twitter has been at the center of acquisition rumors. It seems that at least once per year there is a rumor that sends the stock price higher, only to disappoint investors when it doesn’t pan out.
Let’s look at the potential suitors:
Apple: There are no clear synergies in a merger with Apple. Apple is a high-end hardware maker that does a fantastic job of monetizing its customers through its app store. But how would Twitter fit into this business model? I never thought the rumors of an Apple merger made sense.
Salesforce: Salesforce wanted LinkedIn, which ultimately got snagged by Microsoft. So as soon as that deal happened, rumors began to circulate that Salesforce would go after Twitter. But that really made no sense.Yes, Salesforce mines Twitter data, but their relationship isn’t exclusive. IBM and Google also have access to Twitter data. And perhaps more importantly, Twitter would be an extremely expensive buy. For a $50 billion company like Salesforce, a $15-$20 billion acquisition like Twitter would be hard to swallow, particularly since Twitter doesn’t make much money and it would be extremely dilutive to shareholders.
Disney: I’m struggling to see how this marriage would make sense. Incorporating Twitter into television to make it more interactive is an interesting idea, but Disney could do that without buying Twitter and absorbing its costs. Disney could afford Twitter, but it’s hard to see what their rationale would be for doing so.
Alphabet: The only bidder that MIGHT actually make sense. as Google has the cash to make the deal and management control that would allow them to do it without worrying about a shareholder revolt. But even here, it’s questionable why Google would want a company that has struggled to gain wide acceptance. Facebook has monthly average users of about 1.7 billion. Twitter has been stalled out at about 300 million for nearly two years. Despite being 5 times bigger, Facebook still grows faster.
And as recently as a few months ago, Twitter was reportedly considering changing its 140 character limit. That is a fundamental part of the company’s identity that it’s considering dropping. That shouldn’t be happening at this stage of the game. That’s an early stage problem.
Furthermore, it’s hard to judge the quality of users. I estimate that a quarter of my followers are bots or corporate accounts. That’s not what would-be advertisers want to see.
Bottom line, I would view merger rumors with a large grain of salt. If you’re holding on to Twitter hoping for a sale, you’re gambling, not investing.
Disclosures: Long AAPL
I joined Newsmax’s JD Hayworth to discuss the the possibility of the Fed following in the Bank of Japan’s footsteps and buying stocks.
We also talk about 401(k) plans… and why you should be maxing out yours.
The FANGs have given the market a growth story that it really needed. Revenue growth in the S&P 500 has been tepid at best for years, and earnings per share growth has been driven mostly by buybacks. But the FANGs, for the most part, have been growing at a blistering pace.
Each of the FANGs dominates its respective corner of the market. Facebook is the other social media company with a business model that works. Amazon is the Walmart of its generation, but its bigger growth story is cloud computing. Netflix is the leader in new media. And Alphabet has the world’s dominant search engine and smart phone ecosystem.
None of these are cheap, mind you. Amazon trades for 179 times earnings, Facebook 60, Netflix 300 and Alphabet 30. But in a world starved for a growth narrative, they’ll likely stay expensive for a while.
There are a lot of reasons to believe this is overdone. To start, let’s look at the numbers involved. The day in 1992 that Soros kicked the UK out of the European exchange rate mechanism, the pound dropped about 4%. This was the infamous day that Soros “bankrupted the Bank of England,” and the impact was roughly one third of what we saw the night of the Brexit. That doesn’t quite make sense, particularly given that the pound already freely floated vis-a-vis the euro.
Furthermore, no one has an interest in the pound “blowing up” here. While there is a lot of bad blood between the UK and the rest of Europe right now, no one wants to see the UK fall into a genuine debt or currency crisis. The UK and Europe will continue to be important trading partners, and a strong UK, even out of the European Union, is good for Europe.
The United States also still considers the UK and important diplomatic and military ally, and Japan desperately wants to slow the rise of the yen. (The same can be said of the U.S. and most countries these days.)
So if the pound sinks any further, I would expect major coordinated central bank action from Fed, the European Central Bank and the Bank of Japan to prop up the pound. Call it a modern day version of the old “Greenspan put.”
If you believe, as I do, that the pound will not be allowed to sink too far, it makes sense to go long the pound.
The easiest way to do this is to simply hold a portion of your cash balance in pounds. I’ve done that for a few clients. But if that’s not something your bank or brokerage firm offers, you can also get pound exposure via the Currency Shares British Pound Sterling Trust ETF (FXB).
Another, albeit indirect, way to play a normalizing of exchange rates would be to short the yen. No currency rose harder and faster after Brexit than the yen, which is something the export-dependent Japanese don’t want.
The yen should definitely ease when the fx market returns to “normal.” The yen has traditionally been the funding currency of the carry trade, and whenever the market goes into “risk off” mode, traders unwind their leveraged positions, which means buying back yen… hence the recent strength. So a stable pound should mean a weaker yen.
And finally, even most Brexit bears concede that Brexit isn’t necessarily the end of the world for Britain’s large multinationals, whose operations span the globe. (In fact, a weaker pound is actually better for the companies as it means their overseas earnings get translated at a higher exchange rate.)
So, even if British stocks trade sideways for several months, non-British investors would do well buying British stocks during a rally in the pound. A decent option here would be the iShares MSCI United Kingdom ETF (EWU). Most of the companies here are old enough to have survived the collapse of the British Empire. If they can survive that, then surely they can survive Brexit.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas. As of this writing, he had no position in any security mentioned.
Charles Sizemore is the Chief Investment Officer of Sizemore Capital Management, a registered investment advisor based in Dallas serving individual families and institutions. (Read More)
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