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4 Reasons Why Google Should Buy Twitter

In light of Google's poor fourth-quarter results earlier this month, and the recent hoopla surrounding the Facebook IPO, some have questioned whether Google is losing the war in social networking.

Acquiring Twitter could help Google reverse this trend.

Google has roughly 60 percent of its $44.6 billion in cash and cash-equivalents in the United States, so a purchase, no-matter how expensive, could get done.

The Internet giant reportedly tried to buy Twitter in early 2011, supposedly offering $10 billion, only to have the offer rebuffed. Twitter prefers to remain independent and may eventually go public, though that seems a while off.

Twitter supposedly has been able to grow its revenue drastically, but some question whether it makes sense for the micro-blogging giant to remain a standalone company, or be part of something bigger to reach a much broader audience.

Here are four reasons why Google would be wise to buy Twitter.

Win Social Networking

Google+, Google's social networking initiative, has over 90 million users. Figures for people who actively use the site are hard to find, as Google counts anyone who uses a Google product, and is logged in to their G+ account, as being an active member.

In contrast, Twitter sees incredible amounts of traffic and has become a “go-to” place for breaking news. Twitter users send over 250 million “tweets” or messages a day.

Twitter has long made its presence known during major events, including last night's Super Bowl. This has signaled to some that perhaps Google does not “get” social, and never will, despite CEO Larry Page making social networking a top priority for the company.

In a recent interview, BGC Partners analyst Colin Gillis said Google+ was not a bust, but noted that the search giant needs the customer data that comes out of Google+.

Josh Bernoff, senior vice president for Idea Development at Forrester Research, said that anything Google has done regarding social has been a “flop.” From Google Buzz, to Google Wave, to Google+, Google has had many social networking initiatives, and none of them have been successful, he explained.

“If Google bought Twitter, that would be an admission of guilt. Buying Twitter would be expensive, but it would be worth it,” Bernoff noted.

Money, Money, Money

Google chief Page lauded the progress made by Google+ on the company's recent earnings conference call, but acknowledged that the service is in the early stages of monetization.

Twitter has grown immensely, but its revenue are nowhere close to that of Google. Excluding traffic acquisition costs (TACs), Google had $8.13 billion in fourth-quarter revenue, and earned $9.50 per share, below analysts' estimates.

Twitter reportedly had close to $150 million in revenue for all of 2011, so the difference is staggering. Twitter generates revenue through advertising, sponsored tweets, and other methods.

For comparison purposes, Twitter reportedly generates less revenue than Yahoo does in one quarter and less revenue than Apple did in one day in its most recent quarter.

“Twitter has not come to be where they need to be on monetization,” Bernoff said. “Twitter needs to open up the floodgates and let the money roll in.”

If revenue do not flow in, investors may look for a quick exit, and Google could provide that, with its mountains of cash.

Various media reports have said that Twitter is looking to go public, but if Google were to offer more than the $10 billion that has been rumored, it would be hard for investors to say no.

“Clearly, the newest investors and insiders have a hurdle rate in mind before a sale would be interesting,” Morningstar analyst Rick Summer wrote in an email.

Summer believes that Twitter would be worth more inside of Google, as the Internet giant can better monetize the micro-blogging phenomenon.

“We believe that Google’s scale, monetization engine, and potential tie-in across Google's suite of services would add value,” Summer wrote in an email. Summer has a $744 fair value target on Google.

Reinvigorate Google

Despite Google’s massive revenue, the share price has been stagnant for some time. Since the beginning of the year, shares have lost 10.4 percent, and are down 3.6 percent over the past 52 weeks.

Over the past five years, Google has slightly outperformed the broader Nasdaq, up 16.7 percent, versus 15.6 percent, respectively.

Clearly, the company needs to do something to invigorate its share price. With users increasingly looking for news as it happens, Google needs to ramp up its efforts.

Brian Blau, research director at tech research firm Gartner, says Google needs a real-time option, or a Twitter equivalent.

“I'm fairly certain that Google has to do something with real-time search,” Blau said. Blau does not think it's likely Google will buy Twitter, but notes that Twitter offers several features that would be very useful to Google, such as real time news and information.

The two firms, of course, are not complete strangers.

Google, for example, included tweets into its real-time search initiative, but that stopped over the summer.

Since then, Google has pushed its new search initiative “Search Plus Your World,” and the companies have become embroiled in a verbal spat, with Twitter calling the new search offering a “bad day for the Internet.” Even though Google is still using some data from other social networking sites such as Facebook and Twitter, there has been a lot of backlash from users and other social networking sites.

In a public statement, Twitter said, “We're concerned that as a result of Google's changes, finding this information will be much harder for everyone. We think that's bad for people, publishers, news organizations and Twitter users.”

Google responded on its Google+ account (no shock there), saying it was surprised by Twitter’s reaction. Google said that Twitter chose not to renew the agreement with Google last summer.

BGC Partners analyst Colin Gillis worries about regulatory concerns.

Google appears to be favoring its own properties with its new search initiative, Search Plus Your World, instead of Twitter and Facebook, he warned, adding that this could lead to regulatory problems down the road.

Perhaps Google will ultimately not buy Twitter, but it's clear that Google needs to do something in social networking besides what we have already seen with Google+.

Blau noted that the socialization of search is just getting started. He believes Google+ has to provide a social experience to users.

“Maybe there is a smaller gap for Google to close between real-time data and ‘real-time enough,’ ” Blau said. “However, I agree they need to have a real-time option.”

Fend Off Facebook

By buying Twitter, Google could also prevent Facebook from grabbing it.

Facebook is rumored to have approached Twitter in the past and, with the proceeds from its eventual IPO, Facebook could make an offer in cash and stock for Twitter.

Facebook has a history of snatching up companies it believes are either complementary to its core business, or buying firms for their engineering talent and eventually shutting down the service.

Twitter is most certainly complementary to Facebook, and an acquisition could be a death blow to Google's social networking efforts.

Ultimately, Twitter is as real-time as it gets, and Google’s clock is ticking. Investors will not be patient forever.

Additional News: Twitter Calls Google Search Changes ‘Bad’ for Consumers

Additional Views: Analysts Split on Google’s Future Growth

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Disclosures:

TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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