Rumors about the possible acquisition of Facebook, usually with Yahoo as buyer, have been around for most of this year. Not that Yahoo or Facebook have asked for this attention, but the media is getting antsy. Robert Young put it best last week when he asked - Yahoo & Facebook: Deal or No Deal?. That is certainly the question of the fiscal quarter.
We know that Facebook has been pursued almost since the beginning of its existence. They narrowly avoided a $10 million acquisition by Friendster in mid 2004, just months before they took their first round of financing from Accel Partners. Former Friendster execs say that the deal was close to closing, but last minute negoations over control ultimately disrupted the deal. Since then, Facebook has certainly been approached by every major Internet company.
At Yahoo, the long running courtship has lasted at least as long as this year, and is internally referred to as “Project Fraternity.” Leaked documents in our possession state that an early offer was $37.5 million for 5% of the company (a $750 million valuation) back in Q1 2006. This was rejected by Facebook.
Things really heated up mid year. Yahoo proposed a $1 billion flat out acquisition price based on a model they created where they projected $608 million in Facebook revenue by 2009, growing to $969 million in 2010. By 2015 Yahoo projects that Facebook would generate nearly $1 billion in annual profit. The actual 2006 number appears to be around $50 million in revenue, or nearly $1 million per week.
These revenue projections are based on robust user growth. By 2010, Yahoo assumes Facebook would hit 48 million users, out of a total combined highschool and young adult population of 83 million.
Our sources say that Facebook flatly rejected the $1 billion offer, looking for far more. Yahoo was prepared to pay up to $1.62 billion, but negotiations broke off before the offer could be made.
These documents are now a couple of months old, and both Yahoo and Facebook may have changed their views on a possible deal substantially in that time.
Facebook should have grabbed that $1.62bn and ran. Ah well, I suppose they didn’t know better at that time. Although robust growth lies ahead for the company, I can’t help but wonder what deals they’re pegging their price expectations on. YouTube? Perhaps they’re looking too far out… Although Facebook still stands to capture a large share of the college userbase, ultimately, it’s community will be restricted to those from a certain limited age group. This is very unlike other portals like MySpace which have no definite age restriction. Facebook needs to prove its worth (and justify its decision to reject Yahoo’s earlier acquisition offers) by more aggressively expanding into overseas markets, besides leveraging its existing widespread-acceptance amongst US students. FaceBook China could be a start.
Me thinks that with 1.6b Yahoo can make several sound and safe acquisitions rather than the 1 card unproven deal that Facebook is. Unless the deal has more to do with the “face” than with the “book”.
if yahoo does go ahead with this based on this kind of valuation i will have to accept that yahoo simply aspires to be a me-too clone and utterly lost its roots.
come on, yahoo - remember your heritage - get 360 working first and foremost!
Agressive growth can only be achieved through Inorganic growth. Getting established business model saves a lot of heat and sweat of developing business from scratch. Good luck to Yahoo for Future Gains and Facebook for current dividends.
http://www.tekno-world.blogspot.com
You ever noticed that regardless of the complexity or the amount of money involved in the project analysis …….. All reports appear to have that same, prototypical Excel Spreadsheet look about them
( duh )
Too bad facebook already sabotaged their growth by opening it up to everyone.
I think Zuck is too much of a wild card to know if there’s any offer he’ll accept. It’s interesting to see the CPM rates listed.
http://www.iRegift.com
Nice post! I’m going to save it for my i-banking gig.
The problem with Yahoo’s business case is that they assume that the Facebook model would continue to thrive under Yahoo control. I doubt that Yahoo would be able to keep a hands-off approach to Facebook, meaning it would become ever more commercialized and less focused on it’s primary demographic - college and high school kids.
yahoo are mad and facebook are either greedy or don’t want to sell.
why don’t yahoo just make thier own. They have the in house talent and maybe spin it out of the flickr brand.
no rumor put a fork in it its done!
Yahoo need Facebook for their new publisher network. They would get massive strategic information out of a move like that and put pressure on Google serving ads through MySpace.
If Yahoo get their shit together with a Facebook acquisition and ad serving, and expand the network to outside the US with more multi-language support. They could really hammer home their new system and perhaps even be in a better position to rebid on MySpace and Ebay in the future.
My 2 cents…..;)
If Facebook is mad enough to not want to sell for $1B…then I think I better head back to the lack and whip up a Facebook clone that Yahoo will want to buy.
*head back to the lab!
Jon: Actually, I don’t think Facebook hurt its growth by opening itself up to non-college users. In many ways, privacy and exclusivity has been retained. I’d certainly agree that it wasn’t the smartest business decision, and that Facebook would have been better off without opening itself up. But with all said and done, the cons have struck out the pros. You hardly see people rushing to sign up for Facebook, as it has already developed an exclusive reputation for itself. As long as organic growth continues, Facebook will be just fine.
1 billion in annual profit by 2015? I can understand why Zuckerburg doesn’t want to sell.
Is it just me, or are Yahoo!’s growth predictions for Facebook completely ridiculous? Are they seriously thinking that 60% (!) of the college/highschool crowd is going to be registered? I mean, they have Facebook increasing by like 40% EVERY YEAR for the better part of a decade. Personally, I’m nore inclined to think that Facebook is past it’s prime, or has filled out it’s niche, and if Yahoo! spends $1.6 billion on it, it’s going to be an eBay-Skype level disaster.
@Anif - clones never beat the original. even if yahoo did clone it, would take them better part of a decade to get anywhere near facebook.
@Greg - Nah I dont think so. Facebook is huge, and if they play their cards right and integrate more shit into their pages - why would you want to sell. Youtube went for 1.7bil and didnt have anywhere near the users that Facebook does.
Plus Zucker wants to be in the billionaire club - aparently get better service than if you have $999,999,999.99
60% market penetration - yeah right! Teenagers are now using MySpace way before their college-time, so it’s really a wild guess to think they will suddenly stay with Facebook.
I just love to see how the revenues are growing in there… If Yahoo biz-guys are so smart, why don’t they use the same models for the mothership!?!?!
And then, if Facebook’s penetration is only 8%, I’d think that it would be much cheaper than 1 billion to gain a significant share in the remaining 92%. But hey, who are we kidding, we are talking about Yahoo here: they can’t even dream of developing something that cool themselves…
“Agressive growth can only be achieved through Inorganic growth. Getting established business model saves a lot of heat and sweat of developing business from scratch. Good luck to Yahoo for Future Gains and Facebook for current dividends.” - Rajeev
Totally agreed Rajeev. Why reinvent the wheel especially if you have the cash. Also with Google surging ahead and other competitors taking market share Yahoo needs big deals…really big deals.
I am of the opinion that organic growth is reserved for the “Kings of the Hill” and for mature markets. Go get them Yahoo?
http://www.revafinancial.squarespace.com
I can’t believe they are using discount rates to figure this value. Who has any idea what the appropriate rate is for this kind of acquisition. New-school technology and old-timer financials.
You know, all these facebook kids may reach a certain point where they realize, hmm… maybe I don’t want all of my personal info and pics on the web for all (my 400 friends, 300 of whom I barely know) to see. There is a reason that most of the 30 to 50 crowd hasn’t flocked to a social network and it has a lot to do with PRIVACY.
Making income predictions for a social networking site for 2015 of $1B is ridiculous. This is such a fickle market, I’d be wary of paying more than $1B for Facebook. YouTube makes sense, video is the future of not only “intertainment” (internet + entertainment) but advertising on the internet as well. Facebook however is run by a 23 year old who has occasionally stepped on the toes of his users. I’m not being critical, it’s an honest observation. Every great site (company) makes mistakes, but social networking is one area where you have to be more careful. Myspace is even feeling some backlash. Users have left because the site is so slow and buggy. Someone’s going to have a hit soon and make a major dent in their marketshare. Maybe that’s why Rupert might have it on the block and also explain the internal restructuring. Zuck should take any offer of $1B or greater. And if it really isn’t about the money, say so.
http://www.iRegift.com
Great leak!
I can’t believe - in a ever changing world - Yahoo! is willing to bet; a 10 year in advance bet on a company that isn’t proven. Personally - I think the whole social network thing is a big part of web bubble 2.0
- People with real lives and real friends get bored with myspace in about 2 yrs if that - people with real lives and real friends get bored with face book in about 2 yrs if that -
- Also to get 60% of any market is almost impossible. - Rbowles
Yahoo! should just invest the 1.62 bln in their own contender (not 360) that sucks!
Sean and Richard are on the right argument. This is a social site, which in their short life have proven to be more fickle than pets.com
10 year time horizon??? Please.
By 2015 Yahoo projects that Facebook would generate nearly $1 billion in annual profit.
And 30 years from now Facebook could generate 100 trillion dollars in profit.
Sheesh who is making predictions at Yahoo? This area’s going to mature and more players are going to get into the game. There is no way that Facebook could generate $1B in profit in a year — what’s their profits right now? What division at Yahoo is making $1B in profit right now?
He should have stuck it out, played it smart, and not wore the open toed cheap Adidas sandals. Yup, he could have had it, but will he get the $1.62 Billion now? Doubtful.
Rex
Have fun guys. But Yahoo is just not going to buy Facebook.
Other than as an ad distribution platform, it has very little value to Yahoo - and as has been previously stated Y can continue to build out social networking platform from wildly successful Flickr. Also, what value FB provides, it is woefully insufficient to merit that price.
I think you’ll see Y continue to make the smaller acquisitions that it has been doing the last couple years. They don’t need to be desperate, especially as Panama platform will make them significantly more competitive with Google on search monetization. That will enable them to build out the partner distribution network w/o resorting to “buying the distribution”.
I think that if Yahoo executes well (not as big an if as it was months ago when Panama was repeatedly delayed), the company will be well poised in 07 and beyond for very strong growth in US, as well as international where growth rates in both web penetration and revenues will continue to outpace US for forseeable future.
Greg, Hugh, Sean, Richard Bowles, BlogRead: You hit the nail on the head. These projections are utterly unbelievable. Doesn’t mean they couldn’t happen, but Yahoo would be better off taking $1 billion to Vegas and putting it all on black. The huge jumps they’re projecting in CPM and other ad revenues next year don’t seem to be justified. While I’ve never personally advertised on any social network, including Facebook, I’ve seen comments from people that have and the results are typically unimpressive. This is not surprising to me, since most people use social networks to socialize, not click on ads. Your ad rates hit a physical limit when the cost of the ads goes beyond the point at which they can be profitable. I doubt a 72 cent CPM could be profitable for most advertisers on a social network.
For Yahoo to make such a bet on numbers probably put together by some MBA-type would likely be a disaster. Broadcast.com 2.0 anyone? Not only are these projections unrealistic, but there’s a lot of talk and data indicating that Facebook, MySpace et. al. have hit some sort of plateau. There’s no doubt that to some extent there’s a fad and novelty factor here and while these sites aren’t going away anytime soon, they’re going to face competition as social networking features become a part of more and more major websites and applications. And it would be foolish to think that the “next big thing” isn’t being worked on right now.
I generally agree that Facebook is not quite as valuable as they think they are and they seem a bit greedy. Fbook is a massively popular service, in a ultra important demographic, so it is undoubtedly worth a lot of money, and after the YouTube deal went to Google, Yahoo is eager to place a big bet in the social space, so maybe they are just playing the market really well.
But basing acquisition price on a ten year model seems very, very risky. Only just over the past year are some of the big boys on the Web celebrating their tenth b-days, and how many didn’t ever reach that milestone.
Yahoo is looking at this from a lot of angles, but my single vantage point would be integration with other Y services, if they want to do the standalone thing with every buy it’s a bad bet, but if they have a clear strategy for integration it is hard not ignore the value of this coveted demographic.
- my 3.5 cents -
1.65 billion buys you a lot of friends.
But I guess the nerds at Google and Yahoo still don’t know how to make friends.
Some insiders must have heated up the game to jack up the Value
David -
Don’t worry, models like this do not determine the asking price. For these types of crazy high-multiple deals, the argument often dictates the numbers and not the other way around (i.e. some poor associate has been asked to plug a bunch of assumptions into a spreadsheet to end up around $1-$1.5 Billion). The only reason to do the exercise is to stimulate the “are we completely crazy” discussion among the team. But comparable valuations (MySpace and YouTube) and “gut” play the larger roles.
This is great post…educationally at least. Interesting to get to know how major companies such as Yahoo do analysis for potential acquisitions and I don’t think they make those predictions without a proper basis. Would it be possible for you to share the complete document, Mike?
That is way too much money based on hopeful statistics. Does yahoo remember Broadcast.com? Has that ever generated the billions they paid for that? I think not. In 2015 Facebook will be lucky to have a billon in revenue let alone profit. The web 2.0 companies eyes are getting bigger and bigger with greed. Scary thing is they will probably get the money.
“And it would be foolish to think that the “next big thing” isn’t being worked on right now.”
BINGO
The party line has been that Broadcast.com was a strategic move for their technology and after the purchase most of their technology has been integrated into various Yahoo products like Video and Music and Radio.
Was it worth the 5 billion? Meh, who cares, I have my AdBlocks on when I check Yahoo Mail
I am sorry, did anyone else gag a little at the idea of turning down such an offer. Perhaps M.Z. has a specific island picked out that he’d like to purchase, and doesn’t want to settle for a smaller one.
I agree with 39 (Doug K). If Yahoo is crazy for making such an offer, then Facebook is even crazier for not accepting it.
Or maybe, both parties believe that there are other revenue models possible other than just a straight CPM ad based type deal.
this leak has to be a joke , good thing the deal didn’t happen, otherwise, it won’t just be facebook that doesn’t make it to the 10-year horizon, we won’t even see Yahoo a couple of years from now…
How is it possible for Yahoo, let alone anyone, to generate ad revenue from Facebook when they already sold their advertising rights to Microsoft.
http://www.techcrunch.com/2006.....th-google/
Facebook won’t sell until at least 2009, when their contract ends with Microsoft.
The flaw in the outcome of this spreadsheet that everyones commentary seems to be focused on is derived from this:
(1) Page views/users based on active users which assumes 92% of ave. registered users are active users”
I can only assume this is a “best case scenario” projection, because with a projected penetration like that and an assumption of 92% active user base this spreadsheet really is full of……well its “interesting”.
Couple things to note:
1. IMO from what Ive read, and looking at this spreadsheet it would appear Y would like to turn Facebook into a full blown advertising portal, like spam at the level of Myspace (and likely horrid performance as well)
I dont think this is compatable with the culture at facebook, or from what Ive read about Zuckerberg’s distain for advertising on Facebook.
If this is the case then props to Zuckerberg for sticking to principle and not selling out his community.
Everyone is so focused on money and a purchase price in this comment thread, I wont pontificate but I will say that people dont always found and run start ups with thier mind entirely focused on an exit strategy, in most cases its a labor of love.
And it takes a lot of curage and commitment and dedication to what your doing to reject offers (when you need the cash) that have bad terms, or threaten your company’s value proposition and culture. (when you dont need it, but it would be a good exit personally)
I think if Facebook rejected an offer from Yahoo, then it was a rejection based on more than just money.
Another point is (and especially relavent for a demographic like Facebook) is that you just CANT BUY a community, the community lives or dies based upon its user buy-in, when they opened up registration to non-students there was a backlash in the community. Selling out to a large corporation (ala Youtube, also a community backlash) turns your site from “cool hip and indie” to……well just not “cool” at all, and then to top it all off by increasing the amount of advertising (which they’d have to do to justify a growth and revenue trajectory like that based on a high purchase price) is a community killer.
No one wants to join an advertising spam social networking site, one already exists its called Myspace.
I agree with #42 Michael. My dumb ex-wife wouldn’t. That’s not why I dumped her, but for different reasons all together.
Facebook rejected Yahoo because Marc Zuckenberg is a douche and thinks he can parlay all of this into a fast track executive spot at Yahoo at 22.
It’s a trifecta of insanity:
1) Yahoo willing to spend 1.65 billion for Facebook
2) Facebook turning down that offer
3) Marc thinking he’s the Barry Diller of young turks
Yahoo is drastically overvaluing Facebook’s userbase value. Facebook users are happy with the general service it provides but not generally with the overall experience. Many would be more than happy to jump ship to a hot new product. Some amount of traction would be necesarry for the new product, but as long as a decent percentage of any given user’s friends were on it, they wouldn’t think twice. Yahoo should keep the money and spend some of it on developing something decent for a change.
Micheal: From what I understand, Facebook can pay a breakup fee to get out of that deal and it’s relatively small compared to the type of offer they’re looking for.
If they do plan to hold out, they’re running a risk that they might not be around in the same position a year or two from now. There’s no doubt that Facebook has a great audience in the college market, but whether they can maintain that market in the face of competition that is emerging and will emerge adds a signficant risk factor. Additionally, I don’t see any signs that they are gaining significant traction outside of this market, even though they’ve opened up to other verticals, such as high school and regions. The reason seems fairly obvious: while Facebook has a nice service, it’s pretty basic and looks quite dull compared to some of the stuff that is being done elsewhere. Its basic nature certainly appeals to certain groups, but leaves a lot to be desired to others.
Outside of college where they had first-mover advantage, they have absolutely no tangible advantage over any other new service, and some of the new services hitting the market have some sexy features. For what it’s worth, I’ve never received an invitation to join Facebook from somebody not in college, even though I receive invitations to MySpace and others.
Allen Sligar: you make a lot of valid points, however when Mark Zuckerberg and Facebook decided to take $30+ million in venture capital money, this became more than a labor of love. It’s a business, and it seems like there’s an element of greed here. Obviously selling out the community and turning Facebook into one big advertisement would harm the value, but let’s be realistic that the increased monetization that Yahoo is projecting will require some new advertising, whatever form it takes. If Yahoo wants to make flawed assumptions about monetization and they’re offering you a huge multiple on revenues that you’re unlikely to grow that substantially without more advertising, take it. Some idealism is good, but if Facebook’s rejection of these offers is about idealism and not greed, they need to enter the real world. Extreme idealists most often lose out.
what’s more interesting to me is who leaked this documents, and why?
I think the biggest hole in the data is assuming 92% retention as fb’ers leave college, and eventually join the aarp.
fred stutzman has some good analysis here:
http://chimprawk.blogspot.com
also, consider the mgmt in place at fb, those who weren’t removed for drugs, etc., are still pretty young and unproven, even with vc board members who have quite a few flops behind them (as well as successes).
be sure to check out karel baloun’s great ebook “inside facebook” at http://www.fbbook.com for a great inside perspective of the young team running fb.
Is it possible that someone just wants to run one of hottest companies on the web (independently), vs. selling out to one of the least hot companies on the web? Or, perhaps there’s a greater vision here… and this 1.62B site will be a 10B site? I think we’ve grown accustom to companies in “our” space being acquired during their crucial growth phases- long before they’ve had a chance to prove they’ll have a lasting presence on the web. And for anyone comparing Myspace v. Facebook… get an FB account to see why they’re different.