Facebook’s Acquisition of WhatsApp

https://www.youtube.com/watch?v=vgoctV4AcNw
Overall deal volume and value
 Growth thro acquisition
• Pepsi - Gatorade, Quaker, Tropicana orange juice
– been very successful acquisitions for Pepsi Co.

• Apple – Siri, Novauris, Beats , NeXT ; P&G – Gillette

• High Profile Failures – Tata Corus, Time Warner AOL, Daimler Chrysler, Google
Motorola, Microsoft – Nokia, HP Autonomy

• Why? What makes an acquisition successful or not?

Features
• Common way of implementing growth / diversification strategy
• significant and unique capital budgeting decisions
– no dry run
– substantial exit costs (money / reputation)
– Managing integration extremely complex / starting a new business
Microsoft’s Acquisition
 Mergers and Acquisitions
• Merger
– A transaction where two firms agree to integrate their operation on a relatively
equal basis
– Forms a combined entity

• Acquisition
– A transaction where one firm buys another firm and makes the acquired firm a
subsidiary within its portfolio of business

• Running joke – there is no such thing as merger

• M&A - Coming together of two firms
• How does it play out
– Can be friendly
• A transaction where the target firm solicits an offer from the acquirer

– Hostile takeover:
• the target firm DOES NOT solicit offer from the acquirer - does not wish to be acquired.
 Questions
• What are the advantages and disadvantages ?
• Scary Statistics – odds not in favour
– Running joke - Good consulting advise !

• Very difficult to pull off acquisition as a growth strategy

• Why do acquisition so often – why most of M&A fail ?
• Given the high likelihood of failure, why do firms continue to
attempt such acquisitions ?
• How did MZ get the valuation number i.e. $19b – without lawyers
and iBankers ?
• What is Scope- Scale deal ?
• How to go about Acquisition Analysis – what is the toolkit?
 Growth thro acquisition
• Was it worth it for Facebook to pay such insane amount $19-22
billion to acquire WhatsApp?
• No lawyer / No I-Banker – How did MarcZ get this $19b figure ?
• Would Facebook be able to keep WhatsApp as a
successful independently run operation?
• What would be the best approach to monetize the acquisition in
the future in the context of: “No Ads! No Games! No Gimmicks!”?
 Acquisitions Pros - Cons

ADV
• Insurmountable entry barrier
• Increase Entry speed
• Intangible asset (goodwill pg10)
• Uncertainty and risk of internal development

DISADV
• Synergies do not really exist
• Difficult to integrate
• Highly leveraged
• Overpaying for acquired company
 Two interesting questions
• Why do most M&A fail
– Wrong target – rationale nonsensical (Time warner AOL)
• No obvious synergies

– Difficulties in implementation
• Easy in paper
• PMI challenging

– Overpayment (acq premium + exaggerated benefits = disaster)

• Given the high likelihood of failure, why are bad M&A so common ?
– Moral hazard (I-banker / lawyer/intermediaries)
– Agency problem (not for shareholder value appreciation but
• to build a larger empire / To receive more prestige, power, and pay

– Winners Curse
– Managerial hubris ( self-delusion / giving up means defetat- ego)
 How to Identify the right target
Scale
• high degree of business overlap / expansion in its existing business.
• cost synergies at the top
– larger presence in the market and realize greater economies of scale

• risk - slow-moving behemoth and the synergies never materialize

• Succeed - rapid overall and cultural integration, capture of cost synergies

Scope
• related but distinct business / enter a new market, product line or channel
• growth at the top
– Buying this company gives us access to new and faster-growing markets

• risk - stumble as it learns to manage an unfamiliar business

• succeed - preserves the unique attributes of the company it has just bought,
integrating the two only where it matters
 Acquisition Analysis
• Cost – benefit analysis
• Benefit outweigh the cost
• Purchase/ acquisition price
– Cost of integration
– Best case also worst case ( all the talents leave etc.)

• Think it like an equation

– Strategic benefits
• efficiency gains, complementarity gains(Disney – Pixar; Pepsi – Gatorade, Tropicana,
Quaker, FB-WA);
• Consolidation – antitrust, risk diversification - Cemex
• Where does the value come from - Independent value + value added ( whole more than the
parts ) Again – not just best case but the worst case
 Acquisition Analysis
– Purchase/ acquisition price - Cost
• biggest one is Purchase prise – getting it right a challenge
• Future Cost required to make this acquisition work (success cost)– need to discount purchase
price accordingly
• Acquiree / target does not have bear
• Is $22b all that the acquiring firm bear or more
• If there are suitors then beware of bidding war

– Net benefit more than any other alternative – opportunity cost

• consider whether any strategy we're pursuing is the best use of our time and resources and energy
and money. Or is there some other strategy that we would be better off pursuing instead?
 Alternatives

• DIY: Facebook already had its own messaging app

– market shares in the U.S. with 12% versus WhatsApp 9%.

– Why buy another app, rather invest $22b behind pushing Messenger?

– R&d spend ex1 and ex 7 WA man-years 78 to 144 pg12

• own copies of Instagram and Snapchat failed miserably.

• easy to build an app, more difficult to have it adopted.

• Hire talent:
– For $22b awful lot of good programmers to develop a much better version of WhatsApp!

• Opportunity cost:
– There is no opportunity cost to using $22 billion since capital is not a constraint for Facebook.
 Facebook Motivation and Issues
• Defensive
– maybe Google / Microsoft, reputed to have offered $10 billion

• Holding company
– Facebook, Instagram, and Oculus
– no intent to integrate them, just to invest in key services/products that might even compete with
each other

• Integrate and become social media conglomerate

– “Facebook” with about 1.6 billion MAUs, WhatsApp with 1 billion, Messenger with about 650
million, and Instagram with 400 million
• Once integrated difficult to break-up – anti-trust shield

• Paranoid – fear of being disrupted like myspace or Friendster

– can be seen as buying options on future technologies.

• the question remains whether the $22 billion, or 10% of the company’s valuation is
worth spending on the option
 Revisit Acquisition tool

• Strategic benefit
– sagging US growth ; next gen engagement; mobile first; complementarity; defensive; holding co,

• Cost
– $22b+$18 ; integration challenges incl founders leaving; European comm fined it for misleading
info ; ftc in the us already initiated – recently it settled $5b on privacy

• Opportunity cost
– Diy ; hire talent ; fb so much money – opp cost almost nil !