On both our smartphones and our computers, Facebook dominates our lives. It plays a major role in society, whether we would like to admit it or not (I will admit it. But I am not addicted-I swear!) Thus, it makes sense that anything Facebook does causes a major stir among investors. It bought Instagram nearly 2 years ago for $1 Billion (a genius move considering Instagram’s popularity among both people and companies alike) and, as I previously discussed, it went public. Most recently, Facebook made headlines when it announced that it would be acquiring Whatsapp for a staggering $19 Billion. (“Leora, let me guess, your next blog is going to be about Facebook’s acquisition of Whatsapp, right?” asked a friend of mine. Just to prove him wrong, I am writing about this event now, a few weeks later, after having followed the latest developments. I refuse to be predictable!) This pricey business move, which involves two widely recognized companies, speaks volumes about the nature of mergers and acquisitions, and will have a tremendous impact on Facebook as we know it.
In the investment world, and especially the young and highly unpredictable technology field, $19 billion is a significant sum. Facebook will be acquiring Whatsapp in a combined deal of cash and equity: $4 billion cash and $12 billion of stock (the rest over the course of 4 years). Obviously, Facebook is not carrying out this deal entirely in cold cash; having so much free cash flow would actually be disconcerting, for it would indicate that the company is not wisely investing its money in developments and market securities.
Why did Facebook decide to acquire Whatsapp? Simple: it wants to dominate the social media market. Beforehand, it faced little competition. Now, it must contend with various other social media outlets/communication platforms that take away its users. It is not uncommon to hear people, especially hipsters, proclaim that they are done with Facebook and have deactivated their account. (Ironically, these same people post filtered pictures on Instagram ad nauseam. Facebook owns Instagram, remember?) Facebook noticed that its popularity was waning, especially in comparison to Whatsapp. The truth lay in the numbers: Facebook has 100 million users, while Whatsapp has 450 million users. While I am not part of the latter statistic since I do not have a smartphone, I was aware of Whatapp’s strong presence. Facebook was, too, and decided to be proactive about this competition.
Getting rid of the competition before it is too late is a wise business move. But at $19 billion, did Facebook overpay? Granted, Whatsapp is a ubiquitous feature on many a smartphone. However, the acquisition price must reflect a number of factors. When calculating the purchase price, the buyer must consider yearly profits, the target’s total debts, the industry multiple, and goodwill, to name a few factors. Purchasing a technology company for so much money conjures up memories of the early ‘00s, during the dot com bubble-and the subsequent crash. Companies paid exorbitant amounts to acquire other target companies, anticipating that the value of these companies would continue to appreciate in value; unfortunately, most were forced to ultimately declare bankruptcy. This leads me to wonder: is Facebook so confident in its future success that it believes it can avoid the same fate as those of many top-performing companies nearly a decade ago?
While mergers and actions occur often, we only hear about them when they involve large companies (Note: acquisitions entail one company swallowing up another. Mergers involve combining companies into a distinct, new one, and it is usually marked by a name change.) Not only is there more publicity because people are interested in fate of their shares, but also because the government may choose to get involved. Since America has a mixed economy, the federal government might get involved when companies try to merge or acquire one another in order to prevent monopolies from forming. Monopolies do not allow for any competition, thereby enabling businesses to charge whatever price they wish. In this instance, the government’s role is to protect the people from being exploited by callous businessmen. (Next time, though, try exhibiting more efficiency. Government shutdown, anyone?) There are many laws, such as the Sherman Anti Trust Act and the Clayton Anti Trust Act, that were put in play about a century ago to do just that. Clearly, the more things change, the more they stay the same: the fact that these laws are still so relevant proves that business is still business, no matter the era.
I personally think that the acquisition of Whatsapp was a mistake. Not only do I think that Facebook overpaid, but I also think that the companies will not work well together. Whatsapp is inherently private, while Facebook is marked by its public space. Such fundamental differences will breed major problems in the future. After all, an important determinant of a successful merger/acquisition is that the company culture and ideals mesh well. In this case, Whatsapp will ultimately sacrifice its unique identity for the sake of bolstering Facebook’s popularity. One thing is certainly clear: once this acquisition is carried out, Facebook will surely metamorphose into Worldbook.
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