Inside Facebook

Three months ago, reports surfaced that Facebook and Twitter were in discussions for a $500 million takeover, but couldn’t get a deal done. Today, early Facebook investor and board member Peter Thiel of Clarium Capital publicly explained what happened for the first time in an interview with BusinessWeek.

Says Thiel,

“It became pretty clear it wasn’t going to happen,” Thiel says from the mid-Manhattan office of his hedge fund Clarium Capital. “The deal would have to be done with Facebook stock. And then you have to figure out how much the stock is worth.”

The article continues,

Representatives of Twitter liked the sound of $500 million but balked when Facebook said its stock was worth $8 billion to $9 billion. Twitter’s team knew that Facebook was letting employees sell stock on the secondary market at company valuations ranging from $2 billion to $4 billion…

At that point, Facebook offered Twitter around $100 million in cash, with the rest of the deal in stock. Facebook said it would come up with the $100 million by selling more of its stock to outside investors. Twitter agreed on one condition: that the Facebook stock it received be valued at the price company shares garnered on the open market. Facebook blinked and the deal talks ended…

Facebook and Twitter haven’t completely walked away from one another. The two companies continue to talk, though there are no serious discussions going on, says the person close to Twitter.

Given how highly Facebook leadership thinks of Twitter, it’s likely that the two companies will always have some level of ongoing dialogue. However, since the talks last fall, Twitter has gone on to raise $35 million from Benchmark and IVP at a valuation rumored above $200 million, which would make a $500 million all stock deal much more tough. Twitter will likely be going it alone, at least for a while.