Facebook Fiasco: The Acquisition of Whatsapp

You are deluding yourself if you say that you do not see this name at least thrice a day.

You are deluding yourself if you say that you do not see this image at least five times a day.

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.

There are so many social media platforms nowadays. Facebook felt the pressure to make it sure it remains on top. It doesn't want to end up like Myspace. Who uses Myspace nowadays? Exactly.

There are so many social media platforms nowadays. Facebook felt the pressure to make sure it remains on top. It doesn’t want to end up like Myspace. Who uses Myspace nowadays? Exactly.

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.

Based on the graph, it is clear that Whatsapp has exploded in popularity. Yet when determining the price, one must analyze various metrics-ie EBITDA, P/E ratio, ROE, ROA...

Based on the graph, it is clear that Whatsapp has exploded in popularity. Yet when determining the price, one must analyze various metrics, such as EBITDA, P/E ratio, ROE, ROA… These are some simple metrics that are important to know if you consider investing in the stock market.

 

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?

Mergers and acquisions are frequent in the airline industry. This definitely has something to do with teh fact that the airline industry is a money losing business, for they have high fixed costs but are always concerned with covering the marginal costs by filling that last seat right before takeoff. Unfortunately, fewer companies means less competition, which results in higher prices.

Mergers and acquisitions are frequent in the airline industry. This definitely has something to do with the fact that the airline industry is a money losing business; they have high fixed costs, but are always concerned with covering the marginal costs by filling that last seat right before takeoff. Unfortunately, fewer companies means less competition, which results in higher prices.

 

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.

Published in: on March 18, 2014 at 2:57 am Comments (3)


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3 Comments Leave a comment.

  1. on April 8, 2014 at 4:14 pm Jason Tougaw Said:

    This is really interesting–and helped me think about this story in new ways. It does seem like the crucial question is whether Facebook and Whatsapp are compatible businesses and technologies. I wonder if Facebook bought Whatsapp because they know something we don’t about how the company and its technologies are going to evolve. Maybe there is some plan for the near future that will make Whatsapp indispensable for Facebook?

  2. on May 28, 2014 at 9:25 am Nelly Said:

    So do you really thing that it was a bad idea for facebook to buy whatsapp? I’m afraid for facebook to change the business model of whatsapp

  3. on July 16, 2014 at 4:58 am Rosemarie Said:

    whoah this blog is great i like reading your posts.
    Stay up the great work! You know, lots of individuals are searching around
    for this info, you can aid them greatly.

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