Facebook-Twitter Talks Break Down

• Posted: Wednesday, December 03, 2008
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• Author: pradhana
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• Filed under: Facebook, Google

By Madan Sheina, principal analyst at Ovum

What would have been the first major consolidation between two social networking giants has failed to materialise, as Facebook’s attempts to woo Twitter with an all-stock offer fell on deaf ears. Facebook’s valuation seems to have been the sticking point. But with neither company as yet able to demonstrate that it can make money on a scale that matches its number of users, the outcome might not be a bad thing.

Price might have derailed a deal motivated by Facebook’s inflated valuation

Acquisition talks between two leading Web 2.0 social networking sites, Facebook and Twitter, fell apart last week. Price seems to have halted talks between the firms. Facebook was tabling a $500 million all-stock offer for Twitter. That might seem like a high watermark for a Web 2.0 firm, but apparently it wasn’t enough for the micro-blogging site.

But could Twitter really look at itself in the mirror and justify a higher price, or even that price for that matter? After all, it is still without a revenue-generating business model. Plus its ability to send mini text messages (‘Tweets’) of 140 characters or less on the Internet or mobile phones is a clever idea but hardly rocket science, and certainly doesn’t come with a natural money-making model.

Putting a value on Twitter’s shares, however, creates a big sticking point for privately held Facebook – setting a value on that stock. Valuations are typically based on the company’s last transaction. In Facebook’s case it has reportedly been set at around $15 billion, thanks largely to Microsoft’s $240 million stake 13 months ago for greater advertising rights.

But with the economy spiralling into a downturn that figure might seem to be exaggerated right now. To put it into perspective, Facebook’s valuation exceeds that of Yahoo and eBay, both of which are profitable business models although their valuations have dropped recently. Plus the valuations of these kinds of similar ‘dot.com-esque’ Internet firms have dropped substantially – Google has shed around two-thirds of its value, and News Corp, the parent firm of rival social networking site MySpace, is trading at a third of its 52-week high right now.

Facebook therefore seems intent on leveraging its $15 billion valuation to flex its muscle and try to broker any kind of deal before it drops. But the first thing that Twitter’s management will probably have thought is whether the stock is actually worth $500 million or not.

Rejection might not be a bad thing for Facebook

On face value, combining two of the world’s leading social networking sites seems like a perfect match. Facebook has its own basic Twitter-like features and Twitter lacks the more advanced social features of Facebook. Twitter also has innovation in certain areas like status update that Facebook can benefit from.

However, on a corporate level a merger could be a mismatch. Twitter has yet to sketch out plans to monetise its blogging site. Revenue has always been an issue for Facebook and Twitter’s high SMS costs related to the delivery of its messages to mobile phones in some international markets does not really address that. One way to generate revenue is to target corporate users with some kind of value-added business messaging service.

However, Facebook – so far at least – has never stated its intention to address corporate business communications like its professional sibling LinkedIn. Facebook also seems keen to follow an advertising model whereas Twitter has never pursued this path nor indicated an interest in it – as yet anyway.

Twitter would certainly be a nice addition to Facebook’s stable, but it isn’t necessarily going to take Facebook into new revenue-generating markets. Rather than grab a company that has yet to make a cent, a bigger revenue opportunity for Facebook would be to either compete with or acquire LinkedIn. However, the fear of Twitter falling into the hands of a rival like Google or Yahoo might well be enough to justify another swoop by Facebook at a later date. /PR

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