Bernstein research analyst Jeffrey Lindsay published a report last week that caused some eyebrows to raise. Using the rumors about a possible Google (NSDQ: GOOG) acquisition of Twitter, it made the argument that all too often publicly traded internet companies buy startups that don’t have business models—and probably never will—because the companies doing the buying think they can add those business models post-acquisition. The report was surprisingly stark in its assessment of the culture among VCs and Silicon Valley companies, contending that 35- to 40-year-old executives at the large companies are often wooed into making bad acquisitions by the VCs who convince them they are about to miss out on the next big thing. We called Lindsay yesterday to follow up on some of his points. Below are excerpts from the interview.

What was the reaction to the report from your audience?

My clients are institutional shareholders in these companies.  Based on their comments, it seems they are becoming increasingly concerned about the potential for value destruction that occurs when internet players make poor acquisitions of startups that cannot make money.  Google is actually a good example of a company that often gets a free pass on potentially value-destructive acquisitions because they continue to grow pretty rapidly. If the analysts don’t call out companies when they risk destroying value, then who will?  It’s part of our job.

You say many of the companies being acquired will never make money. But given the massive audiences they reach, shouldn’t we give them more time to formulate a business model before dismissing them? In 2000, BusinessWeek famously said Google would never be able to create a business around search.

Google itself is actually a great case study of the right way for a startup to progress. When it launched, paid search had become commoditized, but Google emerged with a better search engine and found a better way to make money from it. The problem with Facebook, MySpace, and Twitter is that while they generate huge user interest, they haven’t been able to demonstrate the same ability to make money. Google grew to the point that the company was making real revenues and profits and they were able to raise money in the capital markets and go public.

But what about e-commerce? You could say the same thing about YouTube – that it doesn’t make any money and thus was a bad acquisition for Google. But even if YouTube simply referred its audience to other sites to buy goods and took an affiliate fee, it would make a lot of money. Couldn’t you say the same about Twitter?

The jury is still out on YouTube – it’s not clear if it is making any money for Google. It’s definitely possible that Twitter could make money, and if they did come up with a viable value proposition, I’d be among the first to recommend them to investors. The issue is really when commercial activities such as subscriptions or advertising are started on the social network, will the users stay or will they all move off to the next cool startup that is subscription- or advert-free?

But isn’t that in a way what investors in internet companies like Google and Yahoo (NSDQ: YHOO) sign up for? Don’t they pay a premium because they expect those companies to take risks on technology before others do?

It’s theoretically possible that if Twitter were acquired by Google, they could find new ways of making money, but most ideas that I’ve seen start from the premise that they tap into the potential of Google’s paid search. At some point, Google’s Golden Goose is going to keel over from the load it’s carrying. I would argue that it would be better for Google and Yahoo to pass on these types of social- networking acquisitions until they have a clearly demonstrable business model. Why should Google or Yahoo shareholders be taking the risks that the venture-capital market is paid to take?

If the large internet players get there a little late and lose some upside, then so be it. If companies like Twitter have a clear value proposition and players like Google don’t buy them, they can always get to an IPO – so there’s no loss to the internet sector as a whole.  The track record of the industry, however, especially with social networking, is that the established players move too early and get stuck with businesses that are unlikely ever to make money. Is it clear how AOL (NYSE: TWX) will make money with Bebo?

But surely there have been some good acquisitions. Look at Yahoo/Rivals.com, Dow Jones/CBS (NYSE: CBS) Marketwatch, The New York Times/About.com. Those companies weren’t necessarily profitable but turned out to be great contributors to their acquirers’ business.

Yes, but those were companies where there was a business model that could be easily identified – I would add eBay/PayPal to that list but perhaps not eBay/Skype. Most social networks cannot point to ways they will turn their audience into a business. I would say before you jump in with both feet and acquire one of them, you have to have clarity on how the acquisition will eventually create incremental value for shareholders.