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Why Twitter Didn't Sell to Facebook — Really

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The New York Times’ Claire Miller attended a Churchill Club function to fete Twitter co-founder Evan Williams last night. In an onstage interview, Williams talked about many different aspects of his micro-blogging service, which now has 6 million subscribers. First of all, wow — that is an impressive jump in the number of subscribers.

More importantly, Williams talked about why he chose not to sell to Facebook when the Palo Alto-based startup offered to buy it for $500 million in stock. The news of the discussions was first reported by Kara Swisher over on AllThingsD. “It definitely made sense — the strategy we talked about with them — but it wasn’t the right time.” Or the right price. Here’s why:

Facebook offered $500 million of its stock, or roughly 3 percent of the company based on an inflated $15 billion in valuation. In October 2007, when Microsoft invested $240 million in Facebook, it valued the social network at $15 billion. Since then various different reports have emerged which point to a more somber valuation of $5 billion. Three percent of $5 billion actually works out to about $150 million. Given that Twitter was valued between $80 million and $120 million in its last round, the monetary incentive just wasn’t there to sell to Facebook.

More importantly, Twitter’s rejection of Facebook shows that the fast-growing social network has a new headache: Using its stock as currency to acquire companies that can play a meaningful role in its future isn’t going to work.

18 Responses to “Why Twitter Didn't Sell to Facebook — Really”

  1. 1. I said this in BusinessWeek and I’ll say it anywhere, the Microsoft/Facebook deal was a way for Microsoft to part their struggling ad network on Facebook and run up possible impressions for advertisers. They wanted to block the likes of Yahoo and Google so they offered $240 million and said that they’re buying a tiny sliver of a company to make sure that their competitors would have to come in with huge offers for a new supposedly $15 billion company.

    2. @Mike, yes $150 million is more than $120 million but Twitter should sell their company for much more than that. At $150 million, it’s just a 12.5% premium and a tech company can grow by 12% or so in a year. If you can grow in a year independently, why sell? Most companies are sold at premiums between 35% and 50% so a good deal for Twitter would’ve been something between $162 million to $180 million. Really good companies are sold at double their money and with Twitter being a very widely used tool and a stable company, they could easily entertain offers of $250 million and up.

  2. I think, especially in a down economy, any social networking valuation is probably way off. If Facebook was generating even close to the kind of ad revenues that search engines get (they certainly never, ever will), it’d still probably be an over-valuation.

    The inherent problem with Twitter is a) its user base is growing faster than they can really sustain it and b) without some base level of advertising, the whole thing could collapse quickly.

    Combine those two realities that Facebook and Twitter are looking at separately and together it’d be like 2 people hopping in a 1-man boat that’s being pulled under by the tide.

    Both companies need to find a way to monetize without breaking the bond of clean, useful functionality to their user bases.

  3. Open Source Developers and users, Break the chains of web 2.0 share cropping. Understand that Twitter is a closed source application and more than likely will want any Open Source competitor to their service to fail.

    Twitter the friendly little bird wants to become a closed source monopoly. Twitter wants to lock you and your content into their closed silo and they want to generate millions in revenue off of your content, and for this they will give you nothing back to you or your community in return.

    With an Open Source solution you at least have a copy of the application that you have given value. With Open Source you have a choice. If you want to do things differently you are “Free” to take the software and do so. This kind of Freedom also keeps any ideas of vendor/data/content lock in out of the picture.

    At we believe in members freedom to control their accounts, and their content. We also believe that any revenue model should always put the members in the equation first. We believe in the Open Source community and ideals. We know we are not the smartest guys in the room and trust the our community of members and developers.

    Break the chains of the old web 2.0 model. Do not give your content or your software development work to closed source old world companies they only seek to profit from your actions, and that give nothing back to you or to your communities.

  4. Twitter did not sell to facebook because Twitter guys are simply not stupid. MS gave facebook money because they wanted the ad deal…the equity was just an extra bonus. Facebook, the masters of PR and marketing, spun the MS cash as a 15 billion valuation.

    I simply think it is incredibly silly that a company with no real scalable revenue model, burning cash at breakneck speed, is going around acting like it can buy up other companies, especially in these economic times. We all need some of what Facebook execs are smoking :) it will help us get through tough days with a sense of delusional hubris.

  5. First of, FB stock is not cash. It’s like Monopoly Money. True valuation is established only after cash changes hands.

    Twitter is growing, it’s creating new ways of information dissemination. The tweets during the presidential election and the recent mumbai terror events have sort of proven that. While there is a lot of potential here, twitter still needs to work on how it can reduce the noise and be a meaningful service and make money. By staying independent, their cognitive freedoms are maintained. If on the other they went the FB route, then their creative thinking would have been squashed by the product roadmap requirements of the Bergs (Mark and Sheryl).

    I think @ev did the right thing by rejecting FB’s offer at this time. If twitter can ride out this eco-storm, then any option they get after it will probably be better or equivalent to the passed FB offer. The possibility of a FB IPO in 09/10 are remote given the current state of the economy.

  6. You’re right, Sean. Sort of. The press didn’t invent the $15Bn valuation – it was quite plainly announced that Microsoft bought 1.6% of Facebook for $240Mm:

    But ignoring that, using the Google IPO benchmark and assuming FB hits its numbers for 2008, FB should be worth about $2.3Bn. 3% of that is only ~$70Mm.

    But the reality is that if Facebook uses an internal benchmark of $5Bn valuation counting the MSFT investment as an outlier, then they offered Evan & co. 10% of their company, not 3%. Simple math there.

  7. Om,

    This is exactly what I have been saying since this emerged.
    I think you nailed it.

    Hearing people yell that “they should have sold”, “they’re crazy”, is so foolish.

    I believe a day will come, in which the true value of Facebook’s offer, (in volatile equity),
    will look paltry compared to Twitter’s value. And it will take no longer than
    the solidification of Facebook’s actual value.


  8. That $15B valuation was never a $15B valuation in anything other than the press – MS has said that it wasn’t just an investment in a bit of equity, it was also for rights to advertising and search (or something to that effect, I forget the details). The equity just sweetened the deal somewhat.

    I’m not surprised they turned down an all-stock deal. FB stock is pure speculation – there’s no actual value there, only potential. They have traffic and users, but a long way to go in terms of monetization (which is looking to be a much more difficult road to navigate than anyone previously thought).

  9. Cash is King! If Twitter is valued at $120 last round then their low-side exit goals are probably around $400M cash and up. Would Facebook get more than a $15Bn valuation on an IPO today? Google’s initial Market Cap was $23.1Bn on $3.2Bn in revenues. Today Facebook has a $15Bn valuation on projections of $300Mm-$350Mm revenue for 2008.

    So while it was great to fleece MSFT for their cash while the gettin’ was good this represents the burden of expectations and presents a view of a company that is underperforming its cap and substantially overvalued — as you say, their stock isn’t the currency it once was. Thus explains why Zuck opted to turn a few shares into sheckles while he could get some decent money.