Not all deals are created equal. Some deals are more equal than others. And some deals never get done because of reasons beyond the control of the dealers themselves. Aborted deals can play a big role in the entire market because they remind you how fragile stocks really are.
Therefore, knowing what's a good deal or what kills a deal makes us better investors so we are ready to buy stocks on the weakness specifically caused by the breakdowns or the strength that they can generate.
Let's start with the current state of the non-deal of Salesforce (CRM) buying Twitter (TWTR) for the rumored make-or-break price tag of $29 a share. First, the genesis of these talks had little to do with Twitter itself.
Oddly, it had to do with LinkedIn (LNKD) , specifically the break in LinkedIn's stock from Feb. 1 when it was at $208 and Feb. 9 when it went to $100 on really terrible guidance after an OK quarterly report.
LinkedIn is one of the few remaining publicly traded social, mobile and cloud companies, and these companies are laden with data, and, as Salesforce CEO Marc Benioff has stressed to us again and again, data are the new currency of the realm. Benioff's bought a slew of companies and has invested in new products that mine and interpret data to figure out who the best prospects are for whatever enterprise hires them. So when LinkedIn cratered, he got interested in buying the company. But so did Microsoft (MSFT) , which wanted to use LinkedIn to boost its cloud offerings to the enterprise.
It's tough to get in a bidding war with Microsoft given its huge cash position, so Benioff ultimately dropped out when the price tag went to $26 billion, or a few dollars below where LinkedIn traded before the big February break.
Benioff told me yesterday that he's concerned, by the way, that there are grave antitrust concerns with this deal that could really hurt Salesforce, concerns that stem from some executives' comments and what Benioff calls aggressive statements about what they are going to do with the data. He's trying, ostensibly, to block the deal or get some restrictions on the data use. I don't know if he's going to be successful.
As Benioff told me yesterday, "We looked at LinkedIn, too. We would have loved to have it," in part because it had "great deferred revenue so it made it very exciting." In English, that means the company's earnings per share were understated given its subscription model that takes in a lot of money, but that money has to be reported ratably, meaning not all at once but over the lifetime of the subscription, but the cash is in the bank.
Now, cut to Twitter. This company's stock has traveled a long way down from $74 where it traded in its growth heyday at the end of 2013 to $14 back in May. That decline plus the treasure trove of data that Twitter has about individuals who could be potential customers to Salesforce's enterprise clients intrigued Benioff and others, as Twitter's pretty rudderless without growth.
Initially, rumors about any pending sale were dismissed because part-time Twitter CEO Jack Dorsey was given a year's grace period to re-ignite growth.
However, the decline in the stock created too much opportunity for those who viewed Twitter not as it is, which is a trash-talking, rotten-tomato-throwing pseudo-institution that has driven away about as many followers as it has currently, but as what it could be, which is a ton of that new currency -- data.
We learned recently thanks to David Faber that the company was contacted by a host of suitors, most loudly Salesforce but also Disney (DIS) and Google (GOOGL) . It was the cratered price that intrigued and ennui at the top of Twitter that heated the talks. But by the time we found out about the for-sale sign, two things had happened: One, the stock had run from $14 to $21, putting the company at about a $15 billion valuation, $5 billion more than the honey that attracted the attention to begin with, and two, the business had taken still one more step down to the point where the word "disastrous" kept being the operative term to define current business. (Disney is part of TheStreet's Trifecta Stocks portfolio.)
No matter, the stock started rising furiously when word leaked that the company was indeed on the block but that the company told all comers the price tag would be $29, which is $3 above where it came public and twice what attracted buyers to the trophy to begin with.
Given that, unlike LinkedIn, there was no deferred revenue and, if you back out all the stock compensation, this is a no-growth company with no real earnings even as it does have $3.5 billion in cash on the balance sheet, that steep stock rise and price tag caused pretty much everyone to drop out of the running except for Salesforce.
Benioff, again, covets Twitter because of its potential among the last independent social mobile and cloud companies out there, so the price tag of $29 seemed steep, but if the shareholders liked it, then why the heck not?
Until yesterday, when the talks grew so heated that shareholders rebelled wholesale and many of the large growth funds that own Salesforce stock admitted to wanting to dump it all if Benioff pursued the deal. Now, we never got a definitive no from Benioff no matter how hard I tried, but I will tell you the combination of sheer hatred for Twitter by these growth funds and the fact that it could set back Salesforce's amazing timetable from a $10 billion to a potential $20 billion in a reachable time, just revolted the true owners of the company.
So when it was reported that Google dropped out and Salesforce cooled to it, Twitter's stock got hammered.
I still believe that if Benioff could find someone to take a share of the darned thing, to lay off some of the risk, and the cost, so to speak, it could come alive simply because the stock cratered. Nevertheless, paying north of what Microsoft paid for LinkedIn, the price you needed to commit to if you were going to get Twitter's board to sell, just killed the deal, especially because Salesforce execs were concerned that Twitter was just too darned mean. Twitter's become a prime example of Gresham's law where the bad money drives out the good, or in this case, the haters drive out the good people who are worth using artificial intelligence to help customers know where to put dollars.
Put it all together and you get a deal that just doesn't work except at a price, and $29 is the price.
Now what could have changed the narrative here? How about if you got what happened to Qualcomm's (QCOM) stock when it was rumored to be buying NXP Semi (NXPI) last week. NXP, unlike Twitter, actually makes money, a ton of money, and its price tag, rumored to be $120, about $18 north of here, is doable because that's 15x earnings. So I believe that deal gets done because the shareholders of Qualcomm like it. (Google and NXP Semi are part of TheStreet's Action Alerts PLUS portfolio.)
Of course, what we've seen now is that we have a new kind of bad deal, though, and that's one the Justice Department doesn't want to get done. That's why Lam Research (LRCX) and KLA-Tencor (KLAC) decided to go their separate ways after a lauded tie-up. Now, both companies were doing well so neither stock cratered; in fact the acquirer, Lam, saw its stock go higher as it can now do a huge buyback. But that's an example again of two companies that were perceived to be creating value either way, not zero-sum like Salesforce.com and Twitter.
So, in the new world we have to ask ourselves are there deals that are just bridges too far for the acquirers' shareholders to accept, or are there potential deals that just make a ton of sense like Qualcomm and NXP, or are there deals that are too good, like Lam and KLA-Tencor that the government has to stop.
Knowing which is which can save a lot of heartache, as Twitter shareholders discovered today, or create a lot of value and happiness whether consummated or not, the way the broken KLAC-Lam deal or the rumored Qualcomm-NXPI tie-up have and can do. So ask yourselves which deals are good for one side and not the other, or too good to be true, or just plain great all around.
Is Twitter out of play? The lower the stock goes, the more intrigued others will be, notably, say a Verizon (VZ) or an AT&T (T) , both of which need more growth and might be able to reignite that growth at Twitter as part of a larger suite of products. Otherwise, though, Twitter's stock has to go down hard, and the board has to cut its price before anything gets done. I don't think that's likely to happen until we see Twitter's next quarter, to be announced Oct. 27, which I am betting will be hideous or else the deal perhaps could have been done already. (Qualcomm and AT&T are part of TheStreet's Dividend Stock Advisor portfolio.)