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​Why Twitter is a tempting takeover target

After Microsoft's (MSFT) surprise announcement last Monday that it will purchase LinkedIn (LNKD) for a whopping $26 billion, at about a 50 percent premium to its stock price, Twitter shares (TWTR) leaped some 16 percent. They gave back a bit of that spike but still closed the week up 15 percent, or $2.08, at $16.10 mainly because investors believe, more than ever, that would-be buyers would now urgently close in on Twitter.

Microsoft's move on LinkedIn is the spark that can light a fire as "there are more M&A deals in the pipeline now than there have ever been for years," according to Marc Andreessen, co-founder of venture capital firm Andreessen Horowitz, who spoke before a recent Bloomberg Technology conference in San Francisco.

Even before the Microsoft-LinkedIn deal, many analysts regarded Twitter as an attractive buyout candidate, equipped with all the essential ingredients of being an undervalued asset. And the fact that the stock has been in a virtual free fall, having dropped to as low as $13 a share from its all-time high of $74.73 in 2013, demonstrates how much it has become underpriced.

Twitter, a global purveyor of social media chatter, went public in November 2013 at an IPO price of $26. But it didn't get the respect and following that Facebook (FB) did after it went public. For one thing, Twitter's management, led by co-founder and CEO Jack Dorsey, lacks the forcefulness, vision and innovative muster that Facebook leader Mark Zuckerberg and his team clearly have.

Still, some analysts believe the heavy selling in Twitter's stock has been way overdone, although several important factors have played a big part in the pullback. The big knock on Twitter is its failure to drive up its number of monthly users, now totaling some 310 million. So far, the company hasn't convinced Wall Street that it's on a path to strong, impressive growth. Yet more than 500 million tweets are posted daily, according to S&P Global Market Intelligence.

"We note Twitter's global brands and reach, mobile penetration, healthy revenue growth and strong balance sheet with $3.6 billion in cash and investments as of March," said Scott Kessler, equity analyst at S&P Global Market intelligence. He recommends the stock as a "buy," with a 12-month price target of $21 a share even as he acknowledges that "strong negativity" among its critics has hurt the company's image.

Kessler points out that Twitter has "opportunities to grow user base, increase engagement and better monetize its offerings." The market doesn't give the company enough credit, said Kessler, for its global brand and large platform, nor its "history of success related to mobile, unique namesake offering combining broadcast capabilities and real-time communications." And its emerging video properties Periscope and Vine have also been practically ignored.

Part of what attracted Microsoft to LinkedIn is the latter's cache of personal and commercial information from its users, noted Kessler. And he points out that Twitter also has a large accumulation of such information from its users, which the likes of Alphabet's (GOOGL) Google could make great use of -- should it end up acquiring Twitter.

Google and Twitter already have an agreement to do business together, with Google accessing Twitter's platform to add to its search results and other services. Kessler and other analyst see Google as the most likely merger partner or buyer of Twitter.

Kessler acknowledges that legitimate questions remain about user and engagement growth at Twitter, but that's precisely where an acquirer could add value and badly needed energy to a laggard -- and languishing company. He sees the international markets as significant opportunities, "especially given that more than three-quarters of Twitter users are based overseas, but only about a quarter of revenues originate from abroad."

He noted that revenues tripled in 2012 and more than doubled in 2013 and 2014, driven by growth in advertising. In a note of optimism, Kessler forecasts ad revenues will grow 29 percent in 2016 and 23 percent in 2017. And some more good news to the acquirer: The analyst sees annual EBITDA margins improving through 2018, given more successful monetization efforts.

Kessler predicts Twitter will finally make money this year, with estimated earnings of 52 cents a share, versus a loss of 79 cents in 2015. He thinks Twitter can leverage more aggressively its balance sheet, which has $3.6 billion in cash and short-term investments, to pursue more internal and external investments. That would be something to tweet about.

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