No: Twitter Remains the Same

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Twitter shareholders just voted against studying the feasibility of turning Twitter into a company owned by its users rather than investors.

At Twitter’s shareholder meeting, held on May 22nd, shareholders considered Proposal No. 4 to investigate whether Twitter should be reorganized as something else, such as a cooperative or an employee owned company.

Citing the Green Bay Packers, REI, and the Associated Press as examples, the site, buytwitter.org, thought the change would make Twitter more “democratic”.

Unfortunately for buytwitter.org, in this election, 323,830,975 Twitter shareholders were against the proposal while 15,978,718 were in favor.

Twitter Hears Static

Twitter hears static from SoundCloud. Under former CEO, Mike Gupta, Twitter set up a very small venture capital operation two years ago. Then last year, Twitter placed a very large bet on SoundCloud. At the time, SoundCloud closed a funding round that valued the company at $700 million.

SoundCloud is rumoured to be running out of cash after Spotify decided against making an acquisition in December 2016. Troubles at SoundCloud could eventually impact Twitter’s private company portfolio. In recent filings, Twitter’s portfolio companies were valued at $90 million at the end of last year.

Twitter’s New Product VP Costs Millions

Twitter’s new product VP comes with a high price. Keith Coleman, former CEO Yes Inc., became the new product head after him and his six employee were acquired by Twitter on December 1, 2016. Based upon recent filings, Twitter acquired Yes Inc. by paying $6.2 million or $5.5 million in cash and $700,000 in Twitter Stock.

Yes, Inc. joins two other acquisitions Twitter made last year: Magic Pony Technology and Peer. Magic Pony Technology operates out of London and does work in machine learning with eleven employees. With Marc Benioff’s backing, Peer created an employee feedback tool. Twitter paid $85.2 million for both companies; so Magic Pony Technology was purchased for less than the $150 million originally reported by Techcrunch.

 

Twitter Pays More For SoundCloud.

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In today’s latest 10-Q, Twitter reported its current investments in privately held companies, or its corporate venture capital investments made through Twitter Ventures.

Investors may be interested due to the size and timing of the investments; especially given Twitter Ventures recent activity.

At the end of last year, Twitter Ventures had investments in private companies totaling $14.2 million. A modest amount considering the corporate venture capital units of other tech companies such as Intel Capital and GV (Google Ventures).

By the end of June 2016, Twitter Ventures had invested $76 million and now its portfolio totals $90.2 million. In the last six months, Twitter Ventures  had only one major investment: SoundCloud.

Now based on Twitter’s recent disclosure, the actual SoundCloud investment was $76 million; which is higher than the $70 million reported last month by numerous news outlets.

 

Twitter Is Not For Sale!!!

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Twitter’s stock price is down, way down. And the announcement of Microsoft’s acquisition of LinkedIn, has many speculating if Twitter is next.

Twitter is not for sale or at least it is difficult to be acquired. If Twitter was to be acquired, the buyer would not get  Twitter’s most valuable assets – its tax losses (called net operating loss carry-forwards).

Twitter has not yet made a profit and has not ever paid any taxes. But someday, hopefully, Twitter will be profitable and when it does, it can use it accumulated losses to reduce any taxable income and consequently any taxes owed to the Federal Government.

At the end of the last year, the tax losses were $3.4 billion dollars. Said another way, Twitter can have taxable profits of $3.4 without paying taxes. But that tax benefit would be lost if the company was acquired, if you want to read it, here it is (page 33):

…….if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited…

That means the tax benefits will be gone if there is a more than 50% change in ownership. The loss of tax benefits may not matter to an entity that does not pay taxes, but it would be an important issue to an acquirer who is profitable and does pay taxes, such as Microsoft.

LinkedIn has been profitable and has no net operating loss carry-forwards, so it’s not a deal breaker for Microsoft.

 

Twitter Adds More Characters, M and A

Twitter wants to grow, maybe up, by doing more acquisitions. On the April 26, 2016 conference call, Chief Financial Officer, Anthony Noto said as much given Twitter’s more than $3.5 billion in cash. Acquisitions would be in the vane of Fabric, Vine, and Periscope.  Mr. Noto said he would also consider acquisitions which expanded the Twitter platform and involved ad-technology.  

Unlike, Alphabet or Facebook, Twitter has not used merger and acquisitions as part of its growth strategy, so that could be changing.  In addition to Mr. Noto’s statements, Jessica Verrilli tweeted the question – Want to work on acquisitions at Twitter? – on May 6th and then linked to a job posting for a Corporate Development Associate. Ms. Verrilli is senior director of corporate development at Twitter.

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Twitter may be increasing the size and/or pace of future acquisitions by adding more staff. The recent job posting required that candidates have experience with “large and/or complex” deals such as cross border transactions or transactions involving public companies.  The position is advertised  as an “unique opportunity” to be part of “broader strategic efforts at Twitter”.

Twitter Ventures may also be part of that broader strategy.  Twitter Ventures was started last year by former Twitter CFO and employee, Mike Gupta.  There has been four known investments so far – Cyanogen, Swirl Networks, VenueNext, and Muzik. Of these four, VenueNext, which does technology for live events, is noteworthy given Twitter recent deal with the NFL.

Twitter Venture invested an estimated $18 to $21 million last year and $5 million in the first quarter of 2016. Twitter does not disclose separately its investments; instead the amounts show up on its statement of cash flows and its balance sheet as other assets. For example, in the first quarter of last year, it appears Twitter Ventures spent $2 million. That was the same quarter  of the Cyanogen investment.

Until recently, Twitter deal size has been modest when compared to its peers (Facebook, Apple, Alphabet etc). Vine was purchased for $30 million and Periscope purchased for $100 million. Fabric came together from the purchase of MoPub for $219 million and Crashlytics for $38 million.  One of largest transaction so far has been the digital ad platform, TellApart, for $479 million. Twitter used mostly stock, not cash, for purchase of TellApart in 2015.

Mr. Noto and his team need to move quickly. Of the $3.5 billion cash quoted in the conference call, $2.0 billion is on loan. The loan come from two convertible notes sold to institutional investors in 2014. The first note of $1 billion is due in 2019 and the remainder, $1 billion, is due in 2021.  Since notes are convertible, Twitter may get away with paying stock instead of cash, assuming the planned acquisition prove to be successful and increase Twitter’s stock price.

 

Jack in a Box? Twitter’s Ongoing IRS Tax Audit

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Twitter Inc. today (May 3rd) released its Form 10-Q for the quarter ended March 31, 2016. Buried inside the 10-Q, Twitter disclosed its IRS audit has not been completed. Twitter Inc. is being audited for the tax years of 2011, 2012, and 2013. Based upon SEC filings, the audit has been going on for over a year.

Tax Man, Oh Yeah. Twitter first disclosed the Federal tax audit in the third quarter of 2014. At the time the IRS was only look at the tax year of 2012. But then in the next quarter, the fourth quarter of 2014, the IRS expanded the audit by examining the prior tax year of 2011. Finally, in the first quarter of 2015, Twitter disclosed that the IRS was also looking at the tax year of 2013.

Twitter has not had taxable income in its history. In fact as of December 31, 2015, Twitter has tax loss carry forwards of $3.37 billion. That amount can be used to reduce any future taxable income. Said another way, Twitter will not owe any Federal income taxes for long time.

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Lucky Charms. So the IRS could be looking into other tax issues. For example, the IRS may be interested in the tax strategy which allows companies to shift domestic income overseas. This strategy is common among tech companies such as Google, Apple, Microsoft, and others. Taxable income is sent to other places with lower tax rates than the United States such as Ireland.

It easy, especially for tech companies, to execute this tax strategy due to intellectual property. Here how it can work: a U.S. tech company transfers a patent to a subsidiary in Ireland. The Irish subsidiary then charges the U.S. parent a royalty to use the patent. The payment by the U.S. company reduces the its taxable income. And the royalty income received by foreign Irish subsidiary is taxed at low rate.

As long as the cash received by subsidiary stays in Ireland, the income is never subject to U.S.taxes. This is one reason tech companies hold so much of their cash overseas. It is another reason why Apple issued bonds to pay dividends to shareholders; otherwise, by bringing the back the cash to the U.S., Apple would have been required to pay more in Federal taxes.

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Jack in a Box? All this brings us back to Twitter. Twitter established and currently has an Irish subsidiary. Twitter move its international operations to Dublin in 2011. Twitter also disclosed in the recent 10-Q, that it had overseas cash of $160 million, that if return to the U.S. would be subject to taxation.

One can only speculate why the IRS is looking into Twitter. And it could only be coincidence  that the IRS is expanded its audit from 2012 into 2011; the same year Twitter established a presence in Ireland. For example, upon auditing the tax year of 2012, the IRS could have discovered something which caused them look into the prior year of 2011.

Twitter’s tax audit is important because it come mean the IRS is taking a closer look into the tax practices of tech companies as happen with Google, also in 2011.

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