These are hard times for investors who still have faith in fundamental analysis. While some of the most promising tech startups are making noise about going public, they are also valued in ways that could have poor Benjamin Graham spinning in his grave.
First Facebook sees investors lining up to buy privately held shares worth 25 times revenue. Now, according to The Wall Street Journal, Twitter is holding early talks with Google (NASDAQ:GOOG) and Facebook with the microblogging site valued between $8 and $10 billion — or as much as 200 times the company’s recent value.
The news was so much gasoline onto the debate raging over whether we’re seeing dot-com redux: Some declared it insanity, while others maintained that, unlike Webvan and other dot-com disasters, these are companies with a strong future ahead of them.
So, fundamental analysis goes onto the back burner. Let’s pretend that valuations don’t matter right now – because, really, they don’t. Instead, let’s assume things have gotten irrational valuation-wise enough that such a deal could happen. Would they make sense?
If you’re Google, you have to be thinking, yes. Google has planted social-network seeds several times with Orkut, Wave and Buzz. Except for Orkut’s early popularity in Brazil, the results have been a few anemic shoots. The company is building social networking technology into features like Gmail, but it needs a critical mass of users to make it work. Twitter could provide that.
And Google is one of the few companies that could pay an exalted price for Twitter without blinking. Not long ago, it was ready to pay $6 billion for Groupon, which has considerably fewer than Twitter’s 200 million members. Google could put down $10 billion in cash and still have $25 billion on hand — in fact, $10 billion is the amount of cash Google amassed in the past year alone.
Shareholders would scream, but it would be a nice way for Mr. Page to assert his style as CEO. Page has said in the past that Google is willing to forego short-term profits to build long-term success. And buying Twitter fits that game plan, provided Google can integrate it effectively into its overall business.
But does Twitter want Google? That’s less certain. Google has a track record of buying startups like Dodgeball and Jaiku (a Twitter-like microblogging startup) and letting them languish inside its competitive culture. Twitter founder Evan Williams and its current CEO Dick Costolo have sold startups to Google (Blogger and Feedburner) and may not want to return to the Google fold soon.
Twitter would be much better off selling to Facebook. Facebook’s ad technology could give the site the revenue stream it’s been lacking. And while Facebook may not want to spend cash, it could pay for a deal in stock, giving Twitter shareholders an in on the much-coveted ownership of Facebook’s pre-IPO stock.
But it’s not clear Facebook needs Twitter. Facebook’s social network is designed to let users choose who they share their updates with, while Twitter’s interface is more public. I imagine Facebook is in the game mostly to mess with Google’s plans, because a Facebook-Twitter combo would basically kill any hopes Google has of being relevant in the social web.
Or maybe Twitter doesn’t want to sell at all. But it knows these kinds of reports become self-fulfilling prophecies. In December, Twitter was valued below $4 billion. Since then, it has flexed its technological muscle during the recent demonstrations in Tunisia and Egypt. And now, if Twitter stays private and taps instead the venture market, it will be a lot easier to be valued at $10 billion — whether it’s worth it or not.