San Francisco: Jack Dorsey’s job at Twitter Inc. is still on the line.
On Monday, activist investors who had taken aim at the chief executive officer gave him a chance to prove that he should remain at the helm of the company he co-founded. The deal may only delay the inevitable, analysts said. Elliott Management Corp., known for aggressive moves to oust CEOs, essentially put Dorsey on a performance-improvement plan, committing him to meet metrics that would be challenging to achieve normally — and may be impossible at a time when a viral contagion threatens global economic expansion.
Twitter, a social-media platform known for its short messages posted in real time, is most useful when people tune in online for live updates from events, news and sports matches. The company’s advertising strategy revolves around showing marketing messages to those who are logged in. A settlement with Elliott and private equity firm Silver Lake includes requiring Twitter to assign three new seats on its board to the firms, to post user gains of at least 20%, and to accelerate revenue growth and grab a bigger share of the digital-ad market.
The news cycle in 2020, on the surface, would seem to offer a strong opportunity for Dorsey to make strides toward those goals. The U.S. presidential election and the Summer Olympics in Tokyo are the kinds of events that prompt user activity and engagement, and even the spread of Covid-19 could lead more people to log in to check for updates on the outbreak.
But the upside to user growth and ad revenue from these events may be limited. Twitter has banned political ads, meaning rivals Google and Facebook Inc. have picked up most of the gains from the largest presidential campaign spending year on record. Coronavirus-watchers may not be in a buying mood, and advertisers may be budgeting less overall as the health crisis puts their own businesses at risk. Festivals, concerts and movie openings are being canceled or postponed, and sports organizers are considering holding games without fans. Without these tweet-centric moments of optimism, advertising opportunities disappear, said Michael Levine, an analyst with Pivotal Research Group.
Within the next couple of weeks, for instance, the NCAA is going to decide whether to allow fans to attend March Madness, the annual college basketball tournament. It’s the kind of event that is heavily tweeted, during which advertisers take advantage of a surge in activity to sell products. Even more crucial is the upcoming Olympics. If the Olympics were to be canceled or postponed, “it would be a huge missed opportunity for hitting these metrics,” Levine said. The global sporting event was “going to be a very positive way to showcase they’re being way more sophisticated around advertising than they were three years ago,” he said.
Against this backdrop, Elliott’s ambitious targets for Twitter seem even more formidable. The firm’s 20% year-over-year growth target for “monetizable” daily users, or Twitter users that can be served ads, is almost double the rate analysts already projected. The company exceeded that rate in 2019 for the first time in years, and investors don’t expect Twitter to keep it up. Rivals have had to dramatically invest in building or acquiring new products to expand their appeal — like Facebook with its acquisitions of WhatsApp and Instagram, and the introduction of a disappearing-post format to rival Snapchat Inc. Twitter’s product cadence has been slower; the company just last week introduced its version of disappearing posts, called “Fleets,” four years after Instagram copied Snapchat’s similar feature.
“It’s going to require expanding beyond their niche of super active users,” said Rohit Kulkarni, an analyst at MKM Partners. “Acquiring users and holding users is getting more and more expensive on the internet,” even for giants like Facebook and Alphabet Inc.’s Google. Activist investors don’t usually look kindly on a company growing less profitably, even if they’re growing faster.
Elliott, which wanted to remove Dorsey as CEO on concerns that he was distracted and not delivering enough value for shareholders, announced a compromise after intervention from Silver Lake. San Francisco-based Twitter agreed to take a $1 billion Silver Lake investment, in part to fund share buybacks, while also agreeing to add three members to its board and a panel to evaluate Dorsey’s progress.
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The activist investing firm may have stopped short of immediately removing Dorsey in part because of the strong cultural pull he has at Twitter. Even though he simultaneously leads Square Inc., Twitter’s board reinstalled him as CEO almost five years ago because having founder status in Silicon Valley affords a level of moral authority over the product direction.
Dorsey will need more than moral authority to reach the goals set by Elliott. He’ll likely have to take more dramatic steps, possibly by changing the product more than he has in years.
By setting such lofty targets for Dorsey, Elliott may be playing the long game, figuring it will get its chance to come back for the executive if he fails to meet them. When Elliott’s been involved in turnarounds with other target companies, its team has shown little mercy to the C-suite. The CEOs of Citrix Systems Inc., EBay Inc. and Athenahealth Inc. were given chances to meet new growth goals once Elliott filled seats on their boards, but eventually lost their jobs after they missed the mark. In the case of Athenahealth, Elliott acquired the company in a partnership with Veritas Capital — something that could happen with Twitter, especially considering Silver Lake’s past interest in acquiring the company.
In 2015, when Dorsey returned to Twitter, the board had the same qualms as Elliott has now: Twitter’s product direction was unclear, and its growth rate was lackluster. While Dorsey has executed a turnaround for Twitter’s share price since then — with Twitter up about 21% since he permanently took over that October — it has lagged behind other tech companies like Facebook, which has about doubled. Twitter’s persistently middling sales-growth rate seemed to confirm investor fears that it was never going to be the next tech giant. Twitter remains less than a 10th of Facebook’s size by daily users, with all of its same problems, from bullying and hate speech to misinformation and political turmoil. The company commands less than 1% of the digital advertising market, according to EMarketer, compared with 32% for Google and 21.1% for Facebook.
While Elliott is calling for faster sales growth after 2020, that’s also not an easy win for Dorsey. Twitter’s revenue rate is projected to tick up only slightly this year, to 15% from to 14% last year, according to analysts’ estimates tracked by Bloomberg. That’s without accounting for a possible slowdown or recession from the public-health crisis unfolding globally. In the following two years, analysts predict slightly slower growth.
Even those who agreed on the metrics acknowledge there’s some uncertainty about the outcome. Because of the current economic fallout from coronavirus, Twitter’s statement on the settlement deliberately framed the goals as “ambitions,” as opposed to targets or forecasts, according to a person familiar with the matter.
The fact that Elliott didn’t immediately replace Dorsey may reflect the strong support for him among employees, and “acknowledgment that he’s crucial to the ethos” of Twitter, according to Mark Shmulik, an analyst at Bernstein. Employees describe Dorsey as a philosophical thinker. Rounding out his soulful demeanor is a lifestyle that includes bouts of fasting, silent meditation retreats, ice baths and oversized black T-shirts. He rejects corporate expectations in favor of his gut, like a decision to spend up to six months of this year in Africa, learning about the future of payments and working remotely for both his CEO jobs. He’s “re-evaluating” that decision now, he said last week.
But unlike other legendary Silicon Valley founders, Dorsey hasn’t always been in charge at Twitter, nor does he have enough voting power to put up a fight himself.
“Dorsey’s position may remain under scrutiny through 2020,” Shmulik said. “For investors that were hoping for a radical change overnight, the announcement may be a little disappointing.”- Bloomberg
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