Technology

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.

Facebook and Twitter Still Talk

Thiel won't say precisely how much he thinks Facebook is worth other than to say, "It's worth more than people think it is." Despite the deal's failure, Thiel says the company remains open to buying other companies, though he adds the issue of valuing its stock could remain a sticking point.

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, says the person close to Twitter. "They are always interested," the person says of Facebook. "There is a conscious dialogue."

Meantime, Twitter's growth and cultural cachet has continued to soar. Analytics Web site Compete shows Twitter has 6 million unique users, up from around 800,000 last year. Yet Twitter doesn't generate any revenue, despite its surge in popularity.

Controlling the advertising flood

As the Twitter deal shows, Facebook remains intent on improving its product. That means less of an emphasis upon promoting advertisements on the site. "We're also focused on getting the product right," says Thiel. "Getting ads right—that's not the top user demand."

Thiel says Facebook could generate more revenue by flooding the site with more ads but the company believes that this would alienate users. Instead, Facebook is trying to come up with ways to incorporate ads in a less obtrusive way. During a recent interview on The Charlie Rose Show, Marc Andreessen, the successful entrepreneur who last year joined Facebook's board, said the company could make as much as $1 billion a year in sales if it wanted to. Thiel says he agrees that this is a possibility. "There's no reason to think we couldn't do $1 billion a year in sales if we turned on all the dials," he says. "That's about what MySpace does."

Facebook is also continuing to expand workforce. Last winter, Facebook considered implemented a hiring freeze for non-engineering positions, according to several sources familiar with the company. But Thiel says Facebook has decided not to move forward with that plan. "There's been no freeze," he says. "We're growing with deliberate speed. It's close to 1,000 people."

25% staff growth in two months

In the fall of 2008, Facebook said it planned to end the year with 800 employees, up from 400 at the close of 2007. That means the company has brought on about 200 new workers since the beginning of the year. Currently, Facebook lists 86 job openings on its Web site, with the majority being sales and operating positions based overseas, where the company is seeing explosive growth.

But even as Facebook keeps its foot on the accelerator, Thiel says the company does not need to raise money to fuel growth. Since the financial crisis blew up last fall, many startups have been desperately trying to raise capital. But Facebook was shrewd in having raised about $500 million over the past few years. Since the company is still not burning a lot of cash, Thiel says he sees no need to add to its war chest.


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