Why Twitter Inc's Management Changes Could Hurt TWTR Stock Investors

San Francisco, California-based Twitter Inc (NYSE:TWTR) hasn't had a great run this year, and things don't seem to be getting any better lately. On 9th November, Twitter COO, Adam Bain, announced his departure from the company after a 6 year stint. Less than a month later, on Friday, Twitter's VP of global online sales, Richard Alfonsi also followed suit, announcing his exit via a 'tweet'. What's worrying is that Alfonsi's departure is just one of the many executive departures this year. Separately, Keith Coleman will be the third person to don the hat of Twitter's product head this year, a fact that illustrates how bad things have been. Beyond the obvious reasons why investors should be worried, this executive exodus comes with a less visible impact that could seriously dent shareholders.

Why It Matters To Investors

Let's start with the most recent exit, that of COO Adam Bain. As noted by Recode, Bain, who is exiting the beleaguered micro-blogging company after a 6 year stint, is widely credited with Twitter's progress in its advertising business, which until about a year ago, was what made TWTR stock a hot property. Quoting from the Recode report:

"Bain joined the company six years ago from Fox and has been credited with building Twitter’s entire multi-billion dollar advertising business. He’s incredibly well liked inside the company, and some even believed Bain would take over as CEO last summer when Dick Costolo stepped down."

While Bain was thought of by some as "the most competent person at Twitter", it's not worth speculating whether his exit will help or harm Twitter's prospects in the long run, because there's no information on which to base such an analysis. However, at least in terms of sentiment, it's never great for employees and investors, when top executives keep leaving. Twitter CFO Anthony Noto is scheduled to take on the role of COO, temporaily managing both roles, till Twitter can find a new CFO. Again, this could potentially help Twitter in the long run. For now though, the impact of this reshuffle on investors is likely to be two-fold.

Also Read: The Good And Bad Of Buying Twitter Inc Stock Right Now

For starters, the rejig has forced Twitter to dole out an additional (and generous) $12 million in stock to Anthony Noto, who was already Twitter's highest paid executive. What makes it worse though is that Twitter now needs find a replacement for Noto as CFO. And it's very likely that this will mean even more stock-based compensation. As CFO, Noto raked in "$72.8 million in 2014, including stock awards valued at $63.1 million and options of $9.5 million". Given that Noto was paid 3 times his predecessor, his replacement probably won't cost as much. However, top executives don't come cheap, especially when the company in question is perceived by some, as a sinking ship which can only be rescued by M&A activity.

And The Trouble Continues For Twitter Inc

As Motley Fool's Evan Niu noted in a recent post, Noto's exit is only one "in a long string of executive departures, which is the more troubling trend -- and a major red flag for investors." Some of the more recent exits includes that of Twitter's VP of global online sales, Richard Alfonsi, who will also probably need to be replaced.

Twitter's problem is best illustrated by the frequent changes it has seen in another key role, its product head. Twitter's new VP of product, Keith Coleman, will be the third individual to don that hat this year. Coleman, who joins Twitter as part of what is being rather aptly termed an acqui-hire, was CEO of Yes, which Twitter has acquired. While the terms of the deal weren't made public, Coleman, a former product manager at Google, might not have come cheap either. It's worth noting that the stock-based compensation for executives is spread out over a few years. So, not all of it really hurts investors if these executives leave along the way.

What's most disconcerting though is that huge compensation packages may not be enough to retain employees, as evidenced by head of engineering Alex Roetter's exit earlier this year. Incidentally, in 2014, the "third-highest earner was Twitter’s engineering chief, Alex Roetter, who received an $18.8 million stock award as part of total compensation of $19.1 million."

Summing It Up

While the executive exodus is severe enough to be unnerving in itself, all of this is likely to hurt investors further in a less visible form. The massive handouts of stock that are made to top execs are likely to prevent Twitter from curtailing its spends on stock-based compensation expenses and turning profitable in 2017. As we pointed out in a recent post, stock-based compensation has been the single largest difference between Twitter's growing pile of losses and profitability. And as things stand currently, the trend looks likely to continue.

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