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Twitter’s Steep Premium: The Cost of Employee Stock Grants

SAN FRANCISCO — Buying Twitter would be a challenge for a number of reasons. Among the lesser-explored ones: The struggling social network pays out so much stock to its employees.

Even among its Silicon Valley peers, which have drawn closer scrutiny from investors recently because of their generous stock-based compensation practices, Twitter is notable for how much equity it doles out.

And those grants of restricted stock units or options, which would have to be covered to some degree by any buyer, simply add to the purchase price of any deal.

According to Twitter’s most recent annual filing, the company racked up $ 682 million in stock-based compensation last year. By comparison, the company’s adjusted earnings before interest, taxes, depreciation and amortization — which also excludes stock-based compensation — for the year was $ 557.8 million.

Factoring in the payouts would have pushed Twitter well into the red for the year.

By way of comparison, the company reported $ 2.2 billion in revenue for 2015 — meaning that it paid out 31 cents in stock-based compensation for every dollar of sales it collected.

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“Twitter has received expressions of interest from a number of technology companies,” said David Faber of CNBC, including from Salesforce.com and Google.

By CNBC on Publish Date September 23, 2016. Photo by CNBC. Watch in Times Video »

Twitter’s stock-based compensation has been high since going public: Such payouts totaled nearly $ 632 million in 2014 and $ 600 million in 2013. So notable has been its practice that the company was called out as one of the most aggressive users of equity grants by Mark Mahaney, a veteran stock analyst with RBC Capital Markets.

By comparison, LinkedIn paid out 17 percent of its revenue in stock-based grants last year, or about $ 510 million. Salesforce.com, which along with Google has expressed interest in buying Twitter, paid out 8 percent of sales in such packages, or $ 593.6 million, over the same time period.

Tech companies that do not factor stock-based compensation into their preferred earnings metrics, such as Twitter, argue that such payouts are not cash and do not reflect the underlying health of core businesses.

(Not all tech companies urge investors and analysts to ignore stocked-based compensation. Facebook and Amazon are among those that factor in those grants as a real expense.)

But a new owner would need to compensate its newest employees by either paying cash or doling out yet more equity. Ignoring those grants, particularly ones made to the most desirable employees like top engineers, is simply impossible for a buyer.

Those costs have apparently not diminished the interest of some potential buyers. Shares of Twitter were up about 1 percent after Bloomberg reported that Walt Disney was working with a financial adviser to weigh a possible bid.

Still, questions remain about whether Twitter is already valued too richly — its market capitalization as of Monday afternoon was more than $ 16 billion. The equity compensation costs just make the company even more expensive.

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