Should Facebook Put A Knockout Punch Offer On The Table For Snapchat

Marc Bodnick, Co-Founder, Elevation Partners

This is a very complicated question and one that should not be dismissed lightly.

To be clear, I don't know much about this situation and I barely understand Snapchat as a product or business. For all I know, Facebook wasn't really interested and/or discussions weren't serious.

But for the sake of argument, I'll make the raging-bull argument -> the hyper-pro-Snapchat thesis that seems plausible.

Why might Facebook value Snapchat very highly as an M&A target?

The data says that Snapchat's user base are sharing as many photos online as Facebook's users are. This is incredible, given that Snapchat's been around for like two seconds. Snapchat is arguably the biggest competitive threat to Facebook today. It's becoming the social network of choice for young people, and it is a mobile-first / mobile-only service. Snapchat is appealing because it lets kids be social and share online without leaving a permanent footprint. This is compelling vs. Facebook (and LinkedIn, and Twitter, and blogging), where your sharing is preserved for eternity for anyone to see. Snapchat lets kids communicate without worrying about how known and unknown growups think. Ten years into social networking, there have been a bunch of social network competitors to Facebook - Twitter, Tumblr, Instagram, MySpace, etc. As of today, it seems pretty clear that Snapchat is the biggest competitive threat. Snapchat's founders don't have to make an all-or-nothing choice. They can reject Facebook and still take tens or even hundreds of millions of dollars off the table by selling a portion of their stake to investors in secondary deals. (Note that the founders reportedly took $10+mm off the table in a round earlier this year.) So they can get a ton of liquidity while still retaining control of their business and retaining the opportunity to 'go for it' - to build a $20-100B business that's a Facebook or Twitter-scale social network. Instagram arguably accounts for 10% of Facebook's current market cap because of its massive mobile revenues potential. That implies a valuation for Instagram of $10-15B. But Snapchat's users are sharing 5-7x more photos today than Instagram's are! To be clear, this comparison isn't apples to apples because of the perishable/lightweight nature of Snapchat sharing, but it still gives you a sense of comparative scale. To be clear: these numbers could be super-overstated / wrong, but even if you 3x one side of the equation and cut the other by 3x, it's still breathtaking how quickly Snapchat has risen in terms of teenage usage / volume. To justify a $5B valuation, Snapchat (in Facebook's capable business hands) would have to generate $800 million to $1B in revenues in 5 years and (assuming a 50% variable margin) $400-500 million in variable profit. I don't think this is crazy if you look at the mobile ad revenues that analysts are projecting for Instagram.

So, all of which is to say that it's perfectly possible that Snapchat is worth $3B to Facebook. And if that's true, it's also possible that Snapchat is worth even more. I don't know what Facebook's true reservation value is, and I don't know how to think about the future M&A reputation risks to Facebook of making an even bigger offer.

But you could imagine that Facebook's reservation value for Snapchat could be north of $3B - maybe $4-5B.

Consumer tech M&A is littered with bad deals yes. But there are also a number of great almost-deals that should have gotten done but didn't because the seller didn't like the price:

Facebook walked away from Yahoo in 2006, in part because Yahoo was fiddling about price. Facebook and Twitter reportedly were deep in M&A discussions in 2008 but couldn't agree on a price. [Rumor has it] Google and Yelp couldn't come to a deal in 2010

In each of these cases, had the buyer doubled their price, the deal would have probably gotten done and the buyer would have been very happy that he pulled the trigger.

So given all of this, there's a plausible argument that Facebook should make a knockout punch offer - make these guys an offer they can't refuse.

This question originally appeared on Quora. More questions on Snapchat:Do you think Snapchat turning down a $3B offer says something about Silicon Valley? Why is Snapchat worth $3.5B? How can one justify this valuation? Why do Incumbents like DropBox, SnapChat, beat Google/Facebook products?