Facebook's failed Twitter takeover (BW, AD)

By Nancy Tartaglione-Vialatte

In the first public confirmation of acquisition talks between Facebook and Twitter, Facebook's Peter Thiel tells Business Week a deal fell through when the parties disagreed over price and structure. "It became pretty clear it wasn't going to happen," Thiel said. "The deal would have to be done with Facebook stock. And then you have to figure out how much the stock is worth."

Determining Facebook's true value has been a headscratcher. The company is not public so there is no liquid market for its stock. When Microsoft bought preferred stock in the company in 2007, it valued Facebook at $15 billion. Around the same time, an internal Facebook valuation of its shares of common stock landed at about $3.7 billion.

Previously, in November, All Things Digital reported that Facebook was in talks to acquire Twitter for $500 million, most of it in Facebook stock.

The attempt to buy Twitter is in line with Facebook's strategy of pursuing user growth and product innovation over profits. But it's a risky scheme. "It will either turn out to be a great strategy or a terrible strategy," Thiel told BW.

If Facebook is to succeed in using its stock to buy companies, it will need to do a better job at persuading targets of its worth.

Twitter liked the sound of $500 million but balked when Facebook said its stock was worth $8 billion to $9 billion. Twitter knew that Facebook was letting employees sell stock on the secondary market at company valuations ranging from $2 billion to $4 billion. "We said it's not worth it. Don't treat us like children," a person close to Twitter with knowledge of the negotiations told BW.

Facebook then offered Twitter around $100 million in cash and Twitter agreed on one condition: that the Facebook stock it received be valued at the price company shares garnered on the open market. Facebook blinked and the talks ended.

Thiel wouldn't say how much he thinks Facebook is worth other than, "It's worth more than people think it is."

Still, Facebook and Twitter haven't completely walked away from one another. The two companies continue to talk, though there are no serious discussions going on. In the meantime, Twitter's growth and cultural cachet have continued to soar. The micro-blogger has 6 million unique users, yet it doesn't generate any revenue.

That may change, however. AdAge reports that Twitter is eyeing its search business to turn tweets into profits. Last summer, Twitter bought search engine Summize and has recently started integrating search into certain user accounts.

Federated Media CEO John Battelle likens Twitter to YouTube, in that YouTube's real value may be that it has become the second-largest source of search queries, says AdAge. The difference is Twitter enables a search of real-time sentiment and conversation.

One Twitter idea now under discussion is "verified" accounts which would allow users to pay to reserve a Twitter handle and certify that they are representing a corporation or an individual. "That is a great concept, because one of the challenges with social media is 'Who is real?'" Frank Eliason, director-digital care at Comcast, told AdAge.

Another idea is offering paying customers real-time data on who is saying what about a brand.

All ideas are still at the whiteboard stage while Twitter's funders are said to prefer focusing on growth before revenue. Todd Chaffee, general partner of Twitter funder Institutional Venture Partners, told AdAge, "It is a big, emerging media property growing at a phenomenal rate. Frankly, I'm in no rush to resolve these issues."