Facebook’s Thiel Explains Failed Twitter Takeover

This morning, BusinessWeek published my story confirming for the first time that Facebook made a serious offer for Twitter. I’ve also got some scoopy details on the negotiations and why they failed.

Facebook’s Thiel Explains Failed Twitter Takeover
The social network intends to grow during the downturn, but Facebook’s imprecise and illiquid stock valuation limited its appeal to Twitter

Facebook remains on the lookout for acquisitions after its failed attempt to buy microblogging site Twitter, one of the company’s directors and largest investors says. “We’re still focusing on growing as much as possible,” says Peter Thiel in an interview with BusinessWeek.

In Facebook’s first public confirmation of the talks, Thiel said the parties disagreed over price and structure when they seriously considered a deal last fall. “It became pretty clear it wasn’t going to happen,” Thiel says from the mid-Manhattan office of his hedge fund Clarium Capital. “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 is a matter of heated debate. Since Facebook is a private company, there is no liquid market for its stock. When Microsoft (MSFT) bought preferred stock in the company in 2007, it valued Facebook at $15 billion. Around the same time, Facebook placed an internal valuation of the company company’s shares of common stock at about $3.7 billion, according to court documents. The Palo Alto company relied on the appraisal to value employee stock options fairly and avert possible tax problems. But since then, the valuations of most private tech startups have fallen along with stock markets.

Facebook’s Risky Strategy

In November, the blog All Things Digital reported that Facebook was in talks to acquire the fast-growing micro-blogging service Twitter for $500 million, most of it in Facebook stock.

The attempt to buy Twitter fits with Facebook’s risky strategy of pursuing user growth and product innovation over profits. Facebook is hewing to that strategy at a time when many technology companies are slashing costs and announcing layoffs. “It will either turn out to be a great strategy or a terrible strategy,” Thiel says. Larry Yu, a spokesperson for Facebook, declined to comment on Twitter and the other aspects of this story.

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. A person close to Twitter with knowledge of the negotiations confirms that valuation was the primary problem. Twitter management also believed and continues to believe that Twitter has tremendous momentum and that its full potential isn’t close to being realized.

Twitter Wanted Open-Market Valuation
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.

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Tags: BusinessWeek, Facebook, Microsoft, Peter Thiel, Spencer Ante, twitter