Are We Sure Salesforce Could Buy Twitter Even If It Wanted To?
Although salesforce.com, inc. (NYSE: CRM) CEO Marc Benioff indicated his interest in Twitter Inc (NYSE: TWTR), Citi Research believes that a deal could be possible. However, the brokerage thinks that such a deal would put great constraints on salesforce over the next three-plus years. Therefore, it would not be an easy decision for the company to make.
Analysts Walter Pritchard and Tyler Radke see a scenario where salesforce would have to borrow $7.5 billion just to fund any potential transaction — based on $20 billion valuation with $27.50–$28 per share for Twitter. This means the company's debt on a trailing basis would be 4.6x debt/EBITDA, without any synergy.
If salesforce strikes a deal with Twitter, then the company would find it tough to go for any other deals, since there would be little scope for additional borrowing.
In a research note, the analysts said, "We believe management and the board are likely staring at this reality as they weigh options in the process. If bidding went higher (say TWTR >$30/sh) the deal becomes nearly impossible to do (leverage at ~5.5x on trailing basis). The deal looks better on forward leverage ratios."
As far as the impact, the brokerage maintains that any Twitter acquisition would mean slight increase in profit than a standalone salesforce. There is no clarity on other factors like cost reduction, deal structure and tax impact.
Citi maintains a Buy rating and target price of $89 on salesforce on an unaffected basis, which means there is no addition of Twitter or slowdown of M&A.
At last check, salesforce was trading up 3.83 percent at $71.04.
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