What Does Twitter Need With Another Billion (And A Half) Dollars?

I'm glad it isn't only me, but today I've seen just a glimpse of the reaction to yesterday's news. Twitter, which raised $1.8bn in a float just under a year ago, announced yesterday that it's looking to raise a further $1.5bn through two bonds -- one for five years, the other for seven.

Put simply, within a year of raising an absolute mountain of cash, Twitter has popped off to the debt markets to get another mountain of cash. As for me, I'm left scratching my head, and I'm not alone.

There are two reasons why successful companies borrow money. To expand their footprint and buy other companies. There is usually only one reason why unsuccessful companies borrow money -- to pay people and bills they can't afford to pay.

That's what makes the Twitter debt deal all the more fascinating. It already has a pile of cash and has been out buying a network, MoPub ($230m prior to float), a retargeting service, TapCommerce (estimated $100m) and data specialist GNIP (estimated $130m). In its lineup the only glaring omission is in video advertising, and perhaps an analytics business? So why the need for what amounts to the equivalent of another float?

Is Twitter in financial trouble? Well, there aren't that many companies that can celebrate a narrowing of their last quarterly losses to $145m. Advertising revenue would have to double again -- as it did in the last quarter -- to bring them to a point where they would break even, with the cost of acquisitions pushed to one side. 

There are only two quarters left in 2014 to report on, and only an optimist would be expecting the next results to show a profit. 

So you have the odd situation of a company that has never made a penny in profit, which has had a massive float and then gone out and applied for a massive loan. Is it only me that remembers this sort of thing happening fifteen to twenty years ago until the financiers called time on the dot-com bubble?

So which is it? Is Twitter unable to pay its bills? Does it need to put down more tarmac on its its road to profitability? Or is it using the confidence evident in a rallying share price to borrow money when interest rates are at their lowest in years? Could it be amassing a war chest early on so its options are open should prospects cross its path?

I think it's the latter, but again, there are some questions. Why raise so much money now? If your share price is doing great, then surely that gives you the option of going to investors to issue more shares, or acquire companies through a mix of cash and new shares?

The only real alternative you are left with is either that Twitter's finances are in tatters and it needs the money to plug a gap -- which seems unlikely when things are improving -- or that it is planning a massive swoop on a company that would require several hundred millions of dollars to buy. Flipboard has been suggested, due to Twitter's founder being an investor in the tech company which turns feeds in to the equivalent of a beautiful digital magazine. But that is valued at around half the sum Twitter is raising.

So maybe it's a combination of several factors. Perhaps there is a massive purchase in the pipeline and smaller ones are being investigated -- and while those discussions take place, it makes sense to raise the cash when interest rates are so low?

It does make you wonder. Effectively, Twitter could end up potentially raising more than $3bn in a year with the possible aim of buying the companies that will make it grow and become profitable. Is it me just wondering whether investors would have been better off researching the companies it was likely to feel it needed and then invest in those first?

It's time for some research on video advertising start-ups, particularly those with close links to Twitter. If I strike oil, I might be gone some time.

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