tl;dr

In a blog entry on Telecoms.com, James Middleton writes:

More crazy money talk was being bandied around in the world of social networking this week as it emerged that Web 2.0 giant Facebook has been eyeing up Twitter as a potential acquisition.

Facebook, much the darling of the mobile space at present, if recent deals are anything to go by, is believed to have considered snapping up the micro blogging tool, but walked away over a high price tag.

How high? Anything up to $500m if some reports are to be believed – which injects a certain irony into the situation as potential suitors for Facebook, like Yahoo, have in the past been driven off by a high price tag themselves.

Around this time last year, Facebook was apparently valued at around $15bn, after Microsoft paid out $240m for a 1.6 per cent stake in the site. But the problem with these valuations is that there is little substance to them, as well as the fact they are tied to services that don’t make any money yet.

The implication here is that Twitter is demanding silly money – more than $500m – to sell out, but this is incorrect. In fact Mr Middleton’s second point — that these valuations have little substance — was what nixed the Twitter-Facebook deal. Facebook did indeed offer $500m, but that value was to be paid entirely in Facebook stock, valued at the same rates the Microsoft deal where at. Twitter baulked at this, showing skepticism that Facebook is worth $15bn — skepticism that Mr Middleton shares. This has been widely covered (e.g. in Valleywag and by Kara Swisher). The latter notes:

The $500 million offered was in an all-stock form, said sources on both sides, at the $15 billion valuation that came from the Microsoft’s investment in the company last October.

The Twitter side felt that figure was inflated and the shares should be valued at the lower figures that have also been reported for Facebook’s true valuation, more in the $5 billion range.

That would have given the deal a $150 million price tag, which was seen as too low, especially since it was in Facebook stock and not cash initially.

In fact, Twitter wanted cash, which some sources say was offered by Facebook in the $50 to $100 million range, in addition to stock, but taking too much stock was still a major issue.

It seems to me that, far from Mr Middleton’s implication that Twitter is looking for ridiculous valuations, Twitter actually shares his suspicion of valuations like the $15bn for Facebook. As John Gruber notes, “I’m not sure I’d sell a sandwich in exchange for Facebook stock”.

Professional