When Twitter Met Facebook: The Acquisition Deal That Fail-Whaled
[Updated with new details about deal, including who worked on it and info on a cash component.]
About three weeks ago, Facebook and Twitter ended several weeks of serious talks, in which Facebook was offering to acquire Twitter for $500 million of its stock, which also included a cash component.
While rumors of Facebook’s interest were brought up in an interview with Facebook CEO Mark Zuckerberg at the Web 2.0 Summit a few weeks ago, some shot down the idea as silly.
Quite incorrectly, as it turns out, since top execs at both Facebook and Twitter were right then at the tail end of discussions, which were initiated by the privately held Facebook in mid-October, about bringing the two together.
Those talks, sources on both sides said, are now over.
So why did the deal break down?
Well, as is usually the case, over price–was $500 million worth of Facebook stock actually worth $500 million?–and the typical concerns about integration and costs.
But, more important, it seems, was a feeling among Twitter investors and execs that the start-up should still take a shot at building its revenues–there are none right now–as well as it had done at building its growth.
“It’s more about timing,” said one person familiar with Twitter’s motivations. “There is a strong feeling that there is still an opportunity–even with the economic downturn–to blow this thing out.”
Still, combining the world’s fastest-growing social-networking site with what is quickly becoming the best-known microblogging service is actually a natural fit.
That’s especially true given that Facebook–for all its powerful online social connections–has seen Twitter race past it in innovating in the “status update” arena.
While some sources at Facebook said Zuckerberg was becoming frustrated by the buzz Twitter was getting–a market that should have been dominated by Facebook–others at the company said he was interested in buying Twitter because of his respect for its progress.
Indeed, at the Web 2.0 interview, Zuckerberg called Twitter an “elegant model” and said that he was “really impressed by what they’ve done.”
Indeed, with about six million registrations, as reported in October, up 600 percent over the last year, the San Francisco-based Twitter–launched in 2006–has had impressive growth.
(It has also been plagued by technical issues, which are–to be fair–decreasing.)
In any case, for those not familiar with it, the premise of Twitter is dead simple: A registered user logs in via the Internet or a mobile phone and answers the “What are you doing?” question the service asks in only 140 characters or fewer.
It’s quite a clever idea, although–so far–not a money-making one.
To try to goose that, Twitter’s board replaced the engineer who created Twitter, Jack Dorsey, with another founder, Evan Williams, who had served as its chairman and chief product officer.
The more experienced Williams (pictured here) had already built one company–Pyra Labs, which created the Blogger blogging service–that he sold to Google in 2003. He also started the audio and video search site Odeo, where Twitter was actually born.
Still, its investors have not come down on Twitter to hold back its growth efforts, and have handed over $20 million to the start-up so far. In its last round, Twitter was valued at $98 million.
Its funders include: Union Square Ventures, Charles River Ventures, Digital Garage, Spark Capital and Bezos Expeditions, backed by Amazon Founder and CEO Jeff Bezos.
In addition, well-known Silicon Valley figures, such as Marc Andreessen and Ron Conway, have also invested. Interestingly, Andreessen is also on Facebook’s board.
Other private investors include FeedBurner Co-Founder (and now Googler) Dick Costolo, former Epinions Co-Founder Naval Ravikant and former Googler Chris Sacca.
Twitter needs all the investors it can get, since it has no revenue, although it has been exploring things like charging business customers and adding advertising into the consumer service.
Lack of revenues was an issue for Facebook, said sources, especially related to fees Twitter pays for delivery of its messages to cellphones.
While the issue has been manageable in the U.S., Twitter cut off its SMS support in some international markets this summer because of too-high costs.
But, if Twitter was offered to Facebook’s 120 million users, Facebook execs estimated that it might have to deal with huge SMS fees–up to $75 million annually.
“Facebook has its own revenue-generating challenges,” said one person close to the company. “As much as Twitter would give them a lift in the status area, it was still a worry.”
Not enough, said several sources, to stop Facebook from making another approach at some point in the future. “We’d hate to see Twitter go to another company,” said one source.
Indeed, while all are even more price-conscious than Facebook, large companies that could also be interested include: Google (GOOG), Yahoo (YHOO), Microsoft (MSFT) or a large telecom company, such as Verizon (VZ).
If it had completed the deal to buy Twitter, it would have been Facebook’s most significant acquisition by far.
Zuckerberg and Williams did meet and get along well, but the deal was primarily negotiated by Spark Capital partner Bijan Sabet (Spark is a Twitter investor) and Facebook deal guy Dan Rose.
But in this time, at least, the Twitter side was still not interested in selling at the price Facebook had offered.
The $500 million offered was in an all-stock form, said sources on both sides, at the $15 billion valuation that came from the Microsoft’s investment in the company last October.
The Twitter side felt that figure was inflated and the shares should be valued at the lower figures that have also been reported for Facebook’s true valuation, more in the $5 billion range.
That would have given the deal a $150 million price tag, which was seen as too low, especially since it was in Facebook stock and not cash initially.
In fact, Twitter wanted cash, which some sources say was offered by Facebook in the $50 to $100 million range, in addition to stock, but taking too much stock was still a major issue.
There are other ways the pair could have approximated a safer choice for Twitter, via warrants, of course, or other methods.
But, said several sources close to Twitter, the primary reason for not selling was because its board simply did not want to yet or perhaps ever.
Said one source: “The question is, is it really a good idea to sell on the first chance you get?”
Well, for Twitter, we’ll just have to wait and see about that, of course.
[Photo of Evan Williams by Joi Ito. Licensed under Creative Commons 2.0 By-Attribution license.]
Comments
Interesting news, congrats on getting a scoop. So, sounds like Twitter is going to stay single for a year or more then, right? Good to know what Twitter is valued at. Will be interesting to see how they monetize. I sure hope it’s nothing like magpie.
Posted by Robert Scoble at November 24th, 2008 at 1:28 amI can’t believe this was able to be kept a secret for this long. That being said, I’m glad Twitter passed on the Facebook offer. In my opinion, the two communities just wouldn’t mesh well. And while Facebook has come a long ways since it’s early beginnings, I just don’t think they quite get Twitter and microblogging.
Posted by Mike Templeton at November 24th, 2008 at 1:43 amKara ,can you tell if there was discussion on cash payout to founder ( what they call F!@#$ you Money ) .
given Evan’s track record ( VC buy back from ODEO) its highly unlikely but still I am curious .
Posted by Prashant Singh at November 24th, 2008 at 2:17 amTwitter rightly questioned the value of the Facebook shares. It’s just as well FB avoided that mooted IPO.
There’s no way FB is worth $15bn in today’s market, not when Google has lost almost two thirds of its value in the past 12 months.
The key difference between Facebook and Google, other than the fact that one of them isn;t listed, is that the latter makes billions of profits a year.
If the market hits an operation like Google with that kind of savagery then what hope for a company with massive costs, and no plans to seriously roll out a business model for two years?
Posted by Chris Lake at November 24th, 2008 at 6:25 amGreat article. It makes sense that Facebook would be interested in Twitter.
I’m still curious as to what Twitter can do. They do have potential and I like this move to stay independent for now. I would be curious to see how Twitter plans to monetize the service though, I think there are a lot of options there (including non-advertising options).
I also agree that Facebooks $15 billion valuation is drastically overvalued. It was when that number was first suggested, and it should absolutely have to be lower now.
Posted by Jeff Peters at November 24th, 2008 at 9:58 amGreat article.
I’m happy that Facebook added the ability to reply to status updates - making status updates that much more prominent and useful. The more I use both I see Facebook being used to follow and connect with friends and family, while Twitter is used to follow and connect with micro-communities of things I’m interested in (ruby, apple, chicago, etc).
Posted by Jeff Judge at November 24th, 2008 at 11:18 amGreat piece. Good move by Twitter to turn down the offer; they’re doing well enough that there’s no pressure to sell at this point and though I don’t know how much of a runway they have they won’t have an issue raising money if they have to. Seems that given their recent exec changes and the fact that they haven’t employed any of the obvious monetization structures, Evan might have long term plans for the company. Looking forward to seeing where they go.
Posted by Melody McCloskey at November 24th, 2008 at 11:20 amThis article is useful not only because it provides a cash value to Twitter, but also because it debates how Twitter will have a struggle to make it a profitable business.
If Twitter were to ask corporations to pay for their accounts, it may take away the legitimacy that people feel while using Twitter, which is meant to have organic 140 character conversation. Additionally, I particularly liked the parallel drawn that Facebook has yet to figure out its ability to make money while trying to acquire Twitter. Despite its sponsorships and paid advertising, I’m not sure how well users are tuning into that option.
Maybe after Facebook has successful sponsorships / advertising under its belt, Twitter would be more likely to take up the offer of an acquisition. But that will not be any time soon.
Posted by Sapana Shende at November 24th, 2008 at 11:32 amTwitter was the one that walked away? Microsoft didn’t have to buy Netscape…or Real Media. Not sure why facebook would need to buy twitter. Even if the fb mobile / LiveFeed combination turns out to be the Internet Explorer of the social media set, the apps always succumb to the platform. Eventually.
Posted by Michele Clarke at November 24th, 2008 at 12:31 pmNot surprised they would walk away from an offer of pure stock, and personally glad of the outcome.
Not only do the users get nervous but if Twitter gets sold the ramification for hundreds of people who have developed sites, applications, tools, etc. get anxious about how things would be maintained. Could only imagine if they would impose trademark laws.
It will be interesting to see how Twitter does decide to monetize itself and how it will effect its users. Perhaps if Twitter could capitalize on an outside source while leaving the value and uniqueness of its platform alone it would result in a win win for all.
Either way, I am hoping that Twitter remains its own entity for years to come.
Posted by elle nissen at November 24th, 2008 at 3:24 pmAssuming recent ‘08 revenue estimates of $260M are accurate, and assuming Kara’s $15B “ask” valuation is accurate, Facebook is entering acquisition discussions asking for a 58x SALES multiple. The market (Google) is trading at 16x EARNINGS.
But, Facebook’s challenge goes beyond deal-making. While they can point to a ramping platform and improving feature set, Twitter is scaling one of social networking’s hottest features.
While Twitter is at some risk that Facebook will lure away top micro-bloggers or, more likely, marginalize the status update platform by aggregating all updates (see Facebook Connect), Facebook is at a much greater risk that users will stick with the addictive Twitter while neglecting static Facebook accounts.
As Twitter’s management team and board think they can put up big revenue numbers, another approach might have been to offer Twitter $500M in stock on a $5B Facebook valuation (yep, 10%) with the first $250M equity payable on the purchase and the remaining $250M if/when Twitter hit big 24-month revenue numbers.
Posted by Michael Downs at November 24th, 2008 at 5:26 pmWhy is it that I am NOT surprised to learn about a failed acquisition attempt of Twitter by Facebook in a Kara Swisher piece written on “All Things Digital?”
Way to go, Kara! And keep up the good work!
David Politis
c/o Politis Communications
Posted by David Politis at November 25th, 2008 at 7:42 pm“Maximizing corporate value
thru strategic communications”
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