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MARCH 2014

iS whatSaPP woRth thE 19b faCEbook PaiD?

By ryan Chen
On February 19th, Facebook shocked the world by
announcing it had acquired whatsapp for $19 billion. to
give some perspective, this 55-employee company is now
worth more than american airlines. By any fundamental
valuation metric, $19 billion is an outrageous price to pay
for a messaging app that generated an estimated $20 million in revenue in 2013. Of course, trailing revenue multiples mean nothing for internet startups, so this article
will explore some of the reasons why Facebook bought
the company, as well as what it says about Facebooks future.

grown as fast as whatsapp and is forecast to reach 1 billion users by 2015.

For internet companies, the only number more important
than user base is user engagement, since the stickier the
content is, the more money that can be made from advertisers. Engagement is calculated by dividing the number
of daily active users by the number of monthly active
users. as most readers can probably attest from personal
experience, Facebook has already done an outstanding job
with a user engagement of 60%. whatsapp, however, has
an even higher user engagement of 70%.

Deal Structure
although $19 billion dollars is an enormous sum
to pay, Facebook isnt actually paying whatsapp $19 billion. Only $4 billion of the deal is in cash, while $12 billion is in stock and $3 billion in restricted stock units
(more stock). with Facebooks valuation at an all-time
high, this was a great time for Mark Zuckerberg to buy
whatsapp using cheap currency. this deal should have
Facebook shareholders worried, however, as Mark
Zuckerberg is essentially saying that Facebook stock is
overvalued. investors must know this implication as Facebook shares plunged 5% following the news of the acquisition.

User Penetration
although whatsapps penetration is low in the United
states and asian countries like China, Japan, and south
Korea, whatsapp dominates the rest of the world. as you

Growth and Engagement

with 465 million monthly active users, whatsapp
has an astoundingly large user base. More importantly,
whatsapps user base is expected to grow by a jaw-dropping 80% in 2014, far faster than Facebooks user base
was growing when it had 450 million users back in 2010.
in fact, no company with a comparable user base has ever
Changing Oil indUstry dynaMiCs
kartik bhamidipati
Page 2


whatsapp analysis
Ryan Chen
Page 3

can see from the chart, whatsapp (shaded in dark green)

is the leading messaging app in latin america, Europe,
india, and south africa. in addition, the countries that
have embraced whatsapp have done so wholeheartedly:
Story continued on p. 3, see WhatsApp
COntinEntal aCqUisitiOn
Vincent Criscuolo
Page 4

Canadian spECtrUM aUCtiOn

Roni Luo
Page 5

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maRCh 2014

ChanGinG oiL inDUStRy DynamiCS

By Kartik Bhamidipati
the oil industry is changing. gone are the days
that our nations economy depended on the whims of the
Middle East oil hogs. in fact, the United states is on
track to become a large exporter of crude oilperhaps
the largest by 2016,. Meanwhile, sanctions and conflict
have hurt Middle East oil activity. Middle East
economies will no longer be able to sustain themselves
from U.s. oil money. the shifting dynamics in the oil
industry have a lot of geopolitical ramifications, both
domestically and internationally.
Back in 1975, when oil supplies ran low and gas
prices spiked up, Congress responded to the anger of
consumers by signing a law to ban the export of crude
oil. Back then, an oil embargo from OpEC ravished our
economy and left cars waiting in long lines, facing high
prices at gas stations. nixon believed that banning oil
exports would keep the supply of oil higher and the price
depressed. the U.s. now has ample domestic oil with a
60% increase in production since 2005 to eight million
barrels a day. recent advances in hydraulic fracking,
horizontal drilling and exploration of domestic shale
have led to a U.s. natural gas and oil boom. the boom
has both lifted our economies and lowered our petroleum
trade deficit by as much as $56.2 billion in 2013. the
surge in oil has companies starting to question the domestic oil export ban.
there is a huge debate about whether removing
the ban on crude oil exports will affect the price of oil.
One view is that global oil production represents a bathtub full of oil of which the United states is a consumer.
it does not matter which spigots are the source of oil,
only the amount. hence, additional exporting will have
a marginal effect on prices. Others argue that the price
of crude oil could go down if the export ban is lifted.
Currently, oil suppliers in the U.s. have a glut of oil; as
a result, they have not been incentivized to refine efficiently because they have no need to. the efficiency that
results from increased refining efficiency could be
enough to lower domestic and international prices.
to cope with the ban, U.s. oil producers have
been exporting around 200,000 barrels a day based on a
loophole they found in the original restrictions. the
maximum amount that the U.s. can hit is 400,000 barrels
per daya target that will be reached by the end of the
year. however, without any action by Congress, producers will hit a ceiling soon. Congress is unlikely to act

right now because it is a politically unfavorable move to

spearhead any move that might increase gas prices. another conflict exists within the domestic oil industry
while refiners want ample supply in order to compete
internationally, crude oil producers simply want an open
market to maximize the price they can get. it is a debate
with no answer, but it appears that there should be some
level of export to prevent the glut from stopping unprofitable drilling of oil altogether.
the story in the Middle East is a little more complicated. the U.s. has imposed an embargo on iran due
to disagreements over nuclear policy. as a result, iran
has been exporting only 1 million barrels of oil a day, a
fall from 2.5 million a day. in comparison, iraq has been
exporting 3 million barrels of oil a day. the U.s. is in
negotiations now, however, which could result in an
uptick for iranian oil exports. there exists a tension between iran and saudi arabia within OpEC. the two
countries have been indirectly involved in syrias civil
war and are engaging in proxy wars in iraq and lebanon.
if the two countries cannot agree upon specific production quotas, geopolitical competition is likely to intensify. saudi arabia could easily start a price war by
ramping up its production since it has excess ability. if
iran ramped up oil production there would be a few consequences. Both the U.s. and OpEC would be outputting
more oil overall, so there would be a supply increase in
the marketplace. this would help moderate oil prices
and benefit U.s. consumers, which would lower the potential economic benefit of oil producing regions. the
lower economic benefit would incentivize U.s. oil producers to lift the ban on exports and take advantage of
higher international prices.
Complex issues face the oil industry, as a whole.
questions remain as to whether or not we should lift the
oil export ban and what the potential ramifications of
this would be. to make things more complex, it appears
that conflicts in the Middle Eastern countries could
throw oil prices around. Overall, however, it seems that
the massive ramp up in domestic oil production is a positive change for america. with reduced dependence, our
economy is benefiting. there seems to be no end to the
growth in oil production for now. this growth will have
long-term consequences that we must plan for before
major issues start to arise.

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maRCh 2014
WhatsApp, Story continued from p. 1
penetration in countries like germany and spain is over
80%. Because this is a very important user base for Facebooks global ambitions, whatsapp is a strategic complement for Facebook, geographically.
in terms of demographics, there is no denying that
Facebooks users are aging. its fastest growing segment
between 2010 and 2013 was people aged 55 plus. while
everyones grandparents were jumping onto Facebook,
teens were jumping ship: users 13-17 saw a decline of
25% over the same period (or about 8% annualized). the
good news is that whatsapp is very popular with teens,
so Facebook might be able to recapture its shrinking teen
user base. the bad news is that the acquisition amounts
to an admission by Facebook that the companys core

product is already losing its appeal to the next wave of

tech-savvy users. this should have investors worried.
the following table shows an aging trend among
Facebook users and increased adoption by older
individuals.there is no question that whatsapp is a very
attractive buy from the perspective of acquiring users. the
question, however, is whether it can monetize those users.
whatsapp has taken a very difficult stance for Facebook
shareholders: they have promised to keep the service ad-

The acquisition was about gaining access to users, and these users need to be
free, so their only revenue is the $1 they charge per year
after the first year. Even with $1 billion users, there is no
way whatsapp can make enough money to justify its $19
billion price tag. dennis Berman at wsJ did an ad hoc
valuation of whatsapp. Even assuming a very rosy operating margin of 60% (by comparison, Facebooks operating margin is around 40%), he calculated that whatsapp
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would have to charge its users $2.84 annually to justify
the $19 billion price tag. given that whatsapp is competing with free messenger services, even $1 seems like a
hefty price. how will Facebook make back the $19 billion
it paid?
whatsbook (or faceapp?): integration of facebook
and whatsapp
although Mark Zuckerberg announced that whatsapp will remain independent and Facebook hands-off,
he probably had his fingers crossed behind his back. the
acquisition was about gaining access to users, and these
users need to be monetized. it would be very surprising
if Facebook and whatsapp operated as standalone business units when so much value could be created from their

integration. the question is: how will they integrate?

One way would be to start building user identities
in whatsapp. Currently, all you need to sign up for whatsapp is a phone number. that means whatsapp knows
nothing about
its users, and thus it doesnt have any user information to
monetize. Facebook will likely start pushing whatsapp
users to add valuable pieces of identity like age, workplace, and interests
More importantly, whatsapp will likely become
a gateway for Facebook to expand into other areas in mobile, such as payments, games, booking taxis, and making
restaurant reservations. Other messaging services like
weChat and line already do all of this, so it makes sense
for Facebook to leverage whatsapps mobile presence to
do this too. Moreover, additional capacities is where the
real value in messaging services lies, as it is much easier
to charge customers for using a payments system or
downloading a game than simply using a messaging device.
Mark Zuckerberg clearly has big ambitions for
whatsapp. it remains to be seen whether his $19 billion
bet on this 55-employee messaging service will pay off.

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maRCh 2014

ContinEntaL aCqUiRES VEyanCE tEChnoLoGiES

By Vincent Criscuolo
the Players
Veyance technologies is an automotive parts manufacturer affiliated with goodyear. Based in Fairlawn,
Ohio, it specializes in the production of industrial and automotive rubber products, such as conveyer belts, industrial
hoses, air springs, power transmission products, and rubber
track. Employing about 9,000 people, Veyance garnered
about $2B in revenue last year and EBitda (earnings be-

fore interest, tax, depreciation and amortization) totaling

about $270M. Veyance receives about half of its earnings
in the United states and the other half abroad. its major
markets abroad include: latin america, africa, China, and
other asian countries.
Continental ag, based in hanover, germany, is an
automotive manufacturing firm. the company produces a
variety of automotive and transportation industry products,
such as brake systems, chassis components, and tires. in
2012, Continental reported revenue totaling $32.74B and
EBitda totaling $4.88B. Contitech, one of Continentals
six divisions, specializes in rubber and plastics technologies
and is the branch of the firm that is formally acquiring
the Carlyle group focuses on four major business
areas: private equity, real assets, market strategies, and fund
of funds. the private equity group has coordinated the acquisition of Veyance technologies. Carlyle has $170B
aUM (assets under management). according to the pEi
300, Carlyle is the third largest private equity firm in the
world, employing over 1,400 employees.
the Deal
On February 10th, Continental agreed to acquire

Veyance for $1.9B from Carlyle. last year, Veyance reported sales of approximately $1.5B Euros. the Chairman
of Continentals Executive Board dr. Elmar degenhart asserts that Contitechs strategic acquisition of Veyance will
expand Continentals position in the rubber and plastics industry, boding well for the firm as a whole. Financed from
cash and cash equivalents, this transaction will be instantly
profitable after all the paperwork is sorted out, claims degenhart.
the implications
From Carlyles perspective, this is a profitable venture. the private equity firm acquired Veyance for $1.5B in
2007, resulting in $400M in gross earnings on the venture.
in 2011, the average holding period for an investment by a
private equity firm was 4.8 years, indicating that Carlyles
position in Veyance was relatively protracted, but not too
far from average.
From Continentals perspective, this is a smart investment for multiple reasons. First, the acquisition of
Veyance makes sense geographically. Continental, located
in hanover, germany, will benefit from having a center of
operation in Ohio. the United states is an important market
for automotive parts, among other plastic and rubber technologies, and Continental will profit from having easier access to this critical marketplace. additionally, this
acquisition will increase the proportion of Continentals
sales that go to industrial consumers and private end users,

Continental will benefit from shared

technical knowledge. Veyance is an effective automotive parts manufacturer,
and by sharing their proprietary information with Continental, both companies can expect reduced operating
a current goal of the company. the CEO of the Contitech
division, heinz-gerhard wente, explains that Contitechs
Fluid technology and Conveyor Belt groups will primarily
benefit from the enhanced global presence achieved through
the acquisition of Veyance, while the power transmission
and air spring systems groups will benefit as well.
in terms of the synergistic efforts of Continental and
Story continued on p. 6, See Continental
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CanaDian SPECtRUm aUCtion RESULtS

By roni luo
telecom market Dominated by big three
with a three-party oligopoly involving Bell, rogers, and
telus in control of over 90% of the domestic telecommunications industry, Canadians pay one of the OECds highest prices
for mobile services. Earlier this year the Canadian government
held the countrys first spectrum auction in five years, which offered highly prized spectrum in the 700 megahertz band that is
ideal for travelling long distances and penetrating walls and tunnels. telecommunications industry Minister James Moore announced the auction results in Ottawa on wednesday, February
19th, revealing that Canadian telecom firms paid a total of $5.27
billion to gain access to the wireless spectrum.
Early Disappointments among auction Participants
the government had hoped that the most recent spectrum auction would pit at least one new national payer against
the big three operators, thus disrupting the status quo in the market. One potential entrant was Verizon, the second-largest Us
telecom operator by revenue, who decided not to compete in the
auction. the prospects looked bleaker when the other eagerly

anticipated fourth contender, wind Mobile, withdrew from the

auction because it was unable to secure financial backing to participate from its foreign owner. Consumers were understandably
disappointed, as wind Mobile is the most successful of Canadas
wireless start-ups. with over 600,000 subscribers in the most
populated cities, wind Mobile significantly overshadows other
small telecom companies, which typically operate on a much
more local scale.
Moreover, since the members of the big three each understand which spectrum blocks most value from the others, they
use bidding strategies that often encourage inefficiency. needless
to say, consumers expect the big three to use their share of the
new spectrum to offer even more lucrative data services, similar
to rogers recent exclusive broadcast deal with the national
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hockey league and its plans to launch a rival service to netflix.

auction Results favors big three with fragmented Competition
with wind Mobile out of the auction, the big three will
not experience significant domestic competition. however, fortunately for consumers, another potential fourth carrier stepped
up to the plate: quebecs Videotron, which won wireless licenses
in the spectrum in Ontario, British Columbia, and alberta. the
big three that have dominated the Canadian telecommunications
market for years will face competition from a fourth albeit
much smaller carrier in each region. in addition to Videotron,
these smaller carriers include Eastlink, Mts, Feenix, and sasktel.
the future for Canadian consumers appears optimistic.
Unfortunately, despite the rosy, competitive-market picture
painted by Moore, the question of how promising these smaller
carriers will be in intensifying competition in the telecom market
remains unanswered. due to geographical segmentation and low
cash reserves, the potential for consolidation among these small
carriers is low; in fact, merger activity in the market typically involves one of the big three acquiring one of these smaller competitors. Closer inspection reveals that the big three attained over
three quarters of the 97 licences awarded: rogers bought 22 licences for $3.3 billion, Bell bought 31 licences for $565 million,
and telus bought 30 licences for $1.1 billion. in effect, this leaves
little room for smaller competitors to expand as the dominating
players retain pervasive control of spectrums across the country.
optimistic future Developments in the market
On the bright side, the new spectrum promises stronger
signals that will work in off-the-map locations such as elevators,
basements, and parking garages. it will also carry more data at
lower cost to the carriers, savings that the government hopes will
be passed on to consumers. regardless of the quality of competition that this auction introduced to the telecommunications market, Canadian consumers are pleased to see that the government
is making an effort to improve the currently poor service quality
(think Comcast) and reduce the high prices charged by Bell,
rogers, and telus.
in the long run, however, the picture does seem any
rosier. the governments next step, according to Moore, is to roll
out legislation to control the roaming rates that the big three
charge their smaller competitors for using their cellphone networks. given that this legislation is already in the works, smaller
telecom companies may finally receive fair opportunities to grow
and fragment the market currently dominated by the big three.

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Continental, Story continued from p. 4

Veyance, we can first examine the potential benefit to distribution channels. By combining their distribution channels into
one fluid system instead of the two independent systems that
currently operate independently, Continental can significantly
reduce operating expenses. next, Continental will benefit
from shared technical knowledge. Veyance is an effective automotive parts manufacturer, and by sharing their proprietary
information with Continental, both companies can expect reduced operating expenses. also, Veyances operations will
benefit from Continentals deep pockets. that is, with access
to Continentals significant funds, Veyance will benefit from
increased opportunities for capital investment. whats more,
Continentals real assets will prove beneficial to Veyance, as
they will be able to take advantage of Continentals previously
built plants. next, Veyance products, now sold under the Continental brand, will benefit from a greater customer base with
established brand loyalty. less critically, a shared marketing
budget will reduce costs for both firms.
Continental is not the only player excited about the
acquisition. the Chief Executive Officer of Veyance technologies inc., John s. hamilton, explains that he too looks
forward to Veyance complementing Continental both geographically and in terms of product mix. he is perhaps most
excited about the cultural combination. hamilton explains that
Veyance thrives on its steadfast commitment to its customers
and looks forward to sharing those motivations with Continental. he also states that he is excited to continue and enhance Veyances innovative practices and focus on adding
value to the customer at Continental.
in a statement to Veyances customers, Veyance explains that there will be no change in product quality or con-

maRCh 2014
sistency, and Veyance associates will continue to work with
the same clients. additionally, Veyance commits to not alter
any agreements made in contracts before the acquisition. in
terms of growth opportunities, Veyance indicates its excitement for increased diversification of products, increased technological abilities, profitable relationships with Continentals
distributor network, and the vast resources that Continental
can offer a smaller company such as Veyance.
together, the two firms project numbers are impressive. after the acquisition is complete, combined project earnings total 5.4B and the number of employees worldwide
totals 39,000. together, these two firms have considerable potential to shape the global marketplace for rubber and plastic
technologies and have strong potential to post impressive
numbers doing so. Beyond creating value through the products that they produce and sell, the acquisition will also allow
for the continuation of many jobs, adding value to the labor
Lingering Concerns
it is important to note that this deal is still subject to
regulatory approval, which may prove to be an issue. the applicable anti-trust authorities will have to review the deal before it comes to fruition. specifically, the FtC (Federal trade
Commission) will have to review the applicable legislation
and the deal before declaring that Continental can legally acquire Veyance.
all in all, this is an exciting deal for all parties involvedContinental, Veyance, Carlyle, and the customers
that each of these firms service. assuming the FtC approves
this deal, it has the potential to add considerable value to the

Jasmine azizi, abigail Richardson, & Ese Uwhuba

Copy Editors

karan Parekh
Vice President of Financial Analysis

Jenny qian
Senior Managing Editor

Vivianna Lin

Charles bagley, kartik bhamidipati, Ryan Chen,

Vincent Criscuolo, william helmold, Graham Jordan, Jens keicher,
kevin Lai, Roni Luo, austin tedesco, &
brendan tsai
Financial Analysts

Managing Editor
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