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#AcquiringForGrowth

By: Ben Kolada Scott Denne

Twitter is ramping up its M&A program in what appears to be an attempt to buy faster growth. The company made its much-anticipated IPO paperwork public on Thursday and while the numbers are impressive, their acceleration is slowing. To offset the slowdown in its organic business, Twitter is doing more deals than ever before - and bigger ones at that. Its two largest deals, according to our understanding, have both been announced this year, collectively accounting for probably about three-quarters of all the money Twitter has spent on its M&A program. Further, 2013 has been its most active dealmaking year, and we still have one quarter to go.

From what was likely very little revenue in 2009, Twitter's top line has hockey-sticked to $316.9m last year. That's nearly 300% growth year over year and more than 11x what it recorded just two years earlier.

But as the company reaches a larger revenue base, its growth rate is beginning to slow. Annualizing Twitter's first-half results would put its projected 2013 sales at just north of $500m. While it may not be fair to annualize six months of results for such a fast-growing company, we still don't think its 2013 revenue will top $650m, which would be about twice its sales from last year. (We'd also note that Twitter's year-over-year quarterly revenue growth rate has been declining since Q3 2012.)

Further, growth in Twitter's total number of users and their level of engagement is slowing. In the US, which accounts for three-quarters of its advertising revenue, the average number of times that users engaged with Twitter was up only 1% from the previous quarter while the number of monthly users was up just 2%. Compare that with a year ago when those same metrics posted 11% and 9% quarterly growth, respectively.

Given the need for more advertising revenue on a slowing user base, we expect Twitter to increase its volume and value of acquisitions. One area the company could move into is digital video advertising, where the rates are higher than mobile or display. Twitter has already announced a product that enables television advertisers to follow an audience from a TV show to Twitter. That could become a more powerful proposition to both advertisers and content providers if Twitter could expand that capability to other parts of the digital world.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.