Google to buy Twitter?

The rumor of the day comes from Michael Arrington’s TechCrunch: Google is allegedly circling Twitter in an acquisition deal.

It wouldn’t be the first time that Twitter’s founders Biz Stone and Evan Williams sold a business to Google. Five years ago, Stone and Williams sold their company Blogger.com to the giant search company.

Regardless of how true the rumor is, expect other companies to come rushing to Twitter’s door. My top candidates:  Microsoft, Yahoo! and media companies, such as News Corp., which already owns MySpace.

Here’s the conundrum for Williams and Stone: Twitter is hot now, so now might be the time to cash out. On the other hand, with the economy in the dumps, holding out should earn them more money later.

It sounds like Williams and Stone are thinking along these same lines. Arrington reported this afternoon that Williams won’t sell Twitter for $1 billion. Arrington says that Google values Twitter internally at $250 million, so at the moment they are pretty far apart if they are really talking about a deal.

Even though I’m pretty sure most people have no idea why Twitter would possibly be worth so much, Arrington makes a good case for valuing Twitter at $1 billion or more. According to him, Twitter’s real value lies in the power of its search engine and in its ability to tell brands exactly what people think of them in extremely real-time.

For example, if the hotel you stayed in last night booked a rock band next to you and the bathroom was dirty, you can tweet all about it to the hotel chain and to the peeps that follow you. If you have a sufficiently large following, many apologies and free nights should ensue.

That kind of feedback is invaluable to companies who are trying to figure out how to use Twitter, and social-networking in general, both to build their brands and to improve customer loyalty, all of which companies hope will ultimately result in increased revenues.

Apparently, Google and Twitter have already begun working together to build Twitter’s value in the online ad world. According to Ad Age, “the search giant has started offering marketers ad units that stream their five most recent ‘tweets” across the Google AdSense network.”

Stone was on Comedy Central’s The Colbert Report on Thursday night, and said they are building Twitter into a strong, profitable, independent company. Stone didn’t reveal how they plan to do that, but Twitter targets people like nobody’s business. Put some addressable advertising next to that and you’ve got a business plan.

Building Twitter’s value and profit now should mean more money when Stone and Williams sell later. I hope the two know how to be patient. I think putting off a sale now means we’ll get a chance to see Twitter live out its real potential both in terms of its functionality and monetary value.