Tuesday, March 03, 2009

Facebook fails to acquire Twitter

Facebook and Twitter, two of the most hyped company on the web, have considered a deal last fall for about $500 million.
The Palo Alto's company was considering buying Twitter thanks to an exchange of stocks: instead of putting cash on the table to buy a company, you could use your stocks (if your company is worth more than the other one).

How Much Facebook Is Worth?
But one of the problem with all these 2.0 companies is that it is pretty hard to estimate its true worth. Indeed, you could probably value these companies by the audience they generate, and hence determine the advertising potential of it. But Facebook is still struggling to monetize its business model, especially while this economical downturn is cooling down investors and VCs. Facebook is still willing to pursue its strategy of expanding its audience and service range versus securing a business model and I believe that during this crisis investors are more eager to hear about immediate profits and cash flows.

Here is a summary of the scenario.
"Representatives of Twitter liked the sound of $500 million but balked when Facebook said its stock was worth $8 billion to $9 billion. Twitter's team 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," the person says. "Don't treat us like children."

At that point, Facebook offered Twitter around $100 million in cash, with the rest of the deal in stock. Facebook said it would come up with the $100 million by selling more of its stock to outside investors.

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 deal talks ended. "They wanted to buy us but there was not much conviction," the person says."

2.0 Companies Struggle During Crisis
The lack of objective evaluation of 2.0 companies is a big problem during crisis. Even though Facebook seems to be the most well equiped with its large number of users and detailed data, it is still having difficulties to leverage the full potential of the community.

However, Facebook seems on a better pace, as it is already generating revenues from its advertising program, whereas Twitter is still wondering how to monetize the service. It would be a great add up for Facebook to get Twitter, especially as they have launched a Twitter-like service not so long ago, which could benefit of Twitter's expertise. We could even imagine the two services to merge in case of an acquisition.

Facebook To Takeover Twitter?
This episode shows well the difficulties for web 2.0 to be financially healthy, especially during this crisis. These companies might be experts in developping communities and great advertising potential, but seems to struggle while trying to monetize it. Is Facebook going to takeover Twitter? It might actually the first big takeover of a web 2.0 company of another...