Yesterday, there was lots of back and forth about Snapchat, the fast-growing messaging service, and the $3 billion all-cash offer from Facebook that it recently spurned, according to the Wall Street Journal’s sources. (Apparently, three sources also confirmed this account to the New York Times.)
As the Journal reported, the “rebuff” came as Snapchat is “being wooed by other investors and potential acquirers. Chinese e-commerce giant Tencent Holdings had offered to lead an investment that would value two-year-old Snapchat at $4 billion.”
It isn’t that Snapchat’s young founders — Evan Spiegel, 23, and Bobby Murphy, 25 – are strictly opposed to being acquired, suggested the Journal. But they think if they wait until the next year, they’ll fetch an even richer valuation.
If they do, they can thank the media for its help.
I’ve read the numerous reasons why this deal makes sense: Facebook is losing steam with the younger demographic. Its Snapchat competitor, Poke, fell flat. Snapchat’s users access the service via their mobile phones, where Facebook wants to reach more of its own users.
But there seem to be at least as many reasons why this Facebook deal doesn’t add up.
For starters, Facebook’s modus operandi is to create a social operating system for the masses. Snapchat’s stated purpose is to prevent sharing. Facebook grows squeamish at the prospect of lactating mothers. One of Snapchat’s more prominent use cases is sexting.
There’s also the size of the reported offer. With the exception of Facebook’s then $1 billion cash-and-stock acquisition of the photo-sharing service Instagram last spring – a deal that helped Facebook quash a growing threat on the verge of its IPO — Facebook isn’t in the habit of splashing out much on acquisitions.
Maybe it’s been waiting for a growth opportunity exactly like the one that Snapchat presents, but Facebook knows as well as any that it’s very hard to buy or create a “category killer.” Instagram has grown from 30 million monthly active users to 150 million monthly active users under Facebook, but it’s no YouTube; there are still plenty of competitors out there. The same is true of messaging services. SnapChat may be processing 350 million “snaps” per day, but it doesn’t own its space.
Which raises yet another point: This deal is expensive. As far we know, Snapchat has no revenue or business model. We’re not even sure how many users it has. (It last reported 5 million users in April; according to the Guardian’s calculations, it probably has around 26 million U.S. users today.)
Even if Snapchat is worth top dollar right now, Facebook has current assets of $10.5 billion. Paying $3 billion in cash would significantly deplete its balance sheet. Observers have likened yesterday’s news to Google’s reported bid to buy Groupon. But with Google’s many tens of billions of dollars in cash, it could have easily afforded to gamble on Groupon; not so with Facebook and Snapchat.
As a reporter, I love acquisitions: they’re exciting, and they often involve very personal stories. Where the rubber meets the road, though, most acquisitions fail. This deal may have been in the cards at one point. But if I were Facebook, I might be happy it didn’t go through.
