The former CEO of Time Warner famously called his company's merger with AOL the "worst deal of the century." But at least that was a combination of two profitable companies. The takeover we heard Twitter wanted to complete with Tumblr is far more baffling.
Both companies hemorrhage cash, last we checked. Twitter was losing tens of millions of dollars each quarter, according to the 2011 and 2010 financials we were provided, and that was before the microblogging service doubled headcount to around 900 employees. Tumblr makes basically no money - the Wall Street Journal in August called the then-45-person-company's revenue "scant" and "mostly experimental," which has been true since the blog platform was launched nearly five years ago.
Yet buying Tumblr would be expensive. The company's last investment round in fall 2011 valued Tumblr at $800 million. Apparently Tumblr's argument threads, fetish porn curators, joke memes, pop culture misappropriation, mutual favoriting, and minor mass copyright violations have appeal that goes well beyond the young and underemployed.
Despite Tumblr's high valuation, Twitter still went after the company, according to a source close to Twitter, pursuing a deal that would have acquired them using some of Twitter's equity, which was valued in total at $8.4 billion in a recent deal. The idea, we hear, was to add another channel into which Twitter could sell ads. Twitter almost certainly could not pursue such an acquisition with cash alone; it has raised around $760 million which, in these insane bubble times, is probably not enough to buy a microsharing network like Tumblr, lack of revenue be damned.
Twitter declined to comment. Asked about an acquisition offer from Twitter, Tumblr's president John Maloney called it "a false rumor."
Of course, things may have never progressed to the stage of a formal offer. Tumblr could have signalled early on, even in informal talks, that it wasn't for sale. (Business Insider reported there was a "several-hours-long meeting between [Tumbr CEO David] Karp and [Twitter honcho Jack] Dorsey over in Germany at the DLD conference," for example, in the course of poopooing Twitter-Tumblr rumors earlier this year. —Update) Given Twitter's low cash relative to Tumblr's valuation, that wouldn't have been a bad idea.
Read more: http://www.businessinsider.com/we-just-heard-a-rumor-that-twitter-wants-to-buy-tumblr-but-heres-the-truth-2012-1#ixzz1pD5jA5W1
Besides, Twitter had other plans. The company ended up buying a less lively blogging platform, Posterous, which had about 8 percent as much investment as Tumblr, taking what some people claim was a consolation prize.
Good thing it did. It's hard to imagine a pairing of two more overvalued and under-earning companies than Twitter and Tumblr, certainly not in the last 11 years. Aside from losing lots of money, both companies are bumbling about looking for a business strategy, more than five and four years from their founding, respectively. Nor would a combination harmonize the chaos, given the leadership differences; one company is run by a 25-year-old bon vivant car enthusiast on the east coast, the other by a former management consultant who convenes leadership classes and orders up lists of company "core values" out on the west coast.
The move would have been particularly risky for Dick Costolo, Twitter's CEO of 17 months, who we hear faces an ouster campaign.
Maybe Costolo deserves more credit. As one tech executive told us, pre-IPO companies like Twitter don't generally make large acquisitions, preferring to pick up small companies and smart little teams. It's hard to make the math work when you're not publicly traded and when it's thus more tricky to issue new shares. But then Twitter, for better or worse, has never done things by the book.