How did the Deal Work Out?
HOW DID THE DEAL WORK OUT? 9
Howdid the Deal Work Out?
FacebookAcquisition of WhatsApp
OnFebruary 19, 2014, Facebook made an announcement of its majoracquisition (Constine, 2015). This acquisition was between UScentered companies, and it was meant to promote the shared missionbetween Facebook and WhatsApp of bringing connectivity through thedelivery of efficient and affordable internet services. WhatsApp isan ad-free application that allows it users to send unlimitedmessages to other contacts without incurring data fees (Deutsch,2015). Facebook, on the other hand, is one of the world`s largestsocial networking sites (Frier, 2014). Facebook spent the tune of$19billion in the acquisition of WhatsApp, making the transaction thebiggest acquisition for the company in recent times (Olson, 2014).
Rationaleof the Deal
WhenFacebook announced its plan to purchase WhatsApp, the foundersattached a price of $16 billion, $4 billion in cash and $12 billionin Facebook shares (Deutsch, 2015). The price that was paid byFacebook totaled to a premium of $ 19.6 billion and $3.6 billion wasoffered to WhatsApp employees as compensation fees (Deutsche, 2015).Facebook was expected to offer 177.8 million shares of its Class Acommon stock and $4.59 billion in cash to WhatsApp’s shareholdersand 45.9 million shares to WhatsApp’s employees as part of the deal(Olson, 2014). Facebook share prices increased from $68 to $77.56 bythe time the regulatory approval was coming to a close in October(Deutsche, 2015). Fortunately, by the time the deal was closing, the184 million Facebook shares escalated the final sale price by another$1.7 billion (Deutsche, 2015).
Theclose of the deal between Facebook and WhatsApp marked the beginningof the integration between the two companies (Olson, 2014). The halfyear revenue of WhatsApp in 2014 totaled to about $15.9 million(Deutsche, 2015). The company, in general, experienced a net loss ofabout $232.5 million, though the majority of the poor returns werefor share-based compensation (Deutsche, 2015).
InvestorComments Regarding the Wisdom behind the Acquisition
Facebookpaid a premium of over $19 billion to acquire a start-up, whoseincome in the previous year was at $10.2 million (Frier, 2014).Eyebrows were raised by many regarding Facebook’s decision toacquire a start-up company, which was far from being profitable inits previous year (Wagner, 2014). The question that lingered was whythe acquisition was made. The response by Facebook revealed wisdombehind the transaction as noted below.
Facebookexplained its reasons behind the acquisition of WhatsApp, and thefollowing issues came up:
WhatsApp had monthly users that totaled to about 450 million (Wilhelm, 2014).
Out of the 450 million users, about 70% were active on the application in a given day (Wilhelm, 2014).
The Messaging volume of WhatsApp was closer to the global SMS telecom volume (Wilhelm, 2014).
WhatsApp had a potential for growth given the fact that it recruited about 1million users in a given day (Wilhelm, 2014).
Overall,from the investors’ point of view, it is apparent that Facebook sawan enticing value and the potential of the WhatsApp mobileapplication despite the WhatsApp’s losses or costs (Wagner, 2014).As a matter of fact, Facebook was willing to pay $15.3 billion forgoodwill, $2 billion for the user base, $288 million for thetechnology and $488 million the application’s brand value (Wagner,2014). Additionally, it is clear that Facebook wanted to promote thegrowth of WhatsApp. Facebook CEO, Mark Zuckerberg has in factreported saying that he was more concerned about growing the WhatsAppservices in a few more years before it can be used to make revenue ina global platform (Wagner, 2014)
MarketReactions when the Deal was Announced
Themarket reaction to the announcement of the Facebook-WhatsApp deal hadmixed reactions. In some camps, the news was well received, while inother, the move by Facebook did not augur well by some by individualmarket and industry watchers. Some of the reactions were as below.
Someof the market watchers indicated that the move by Facebook wassomewhat strategic (Knowledge Wharton, 2014). Facebook was keen toprotect WhatsApp from competitors, which was a rather smart move(Knowledge Wharton, 2014). Opportunities for growth manifest in theacquisition, particularly in the emerging markets where WhatsApp hasa strong presence (Knowledge Wharton, 2014). Additionally, the movewas critical given the consumer trend that looks towards sharingdifferent kinds of content, which is currently absent in Facebook butis possible with WhatsApp (Knowledge Wharton, 2014).
Anothermarket watcher deemed the acquisition as a positive move by Facebookgiven that its growth has slowed while that of WhatsApp has seen atremendous growth (Knowledge Wharton, 2014). Facebook, according tothe market watcher was likely to benefit from the addition ofcapabilities and keeping competitors at bay, through the WhatsAppacquisition (Knowledge Wharton, 2014). It is apparent that somemarket watchers deemed the move by Facebook as being necessary and astrategic one.
Theinvestors at Wall Street were displeased by the announcement of theacquisition (Wilhelm, 2014). As a matter of fact, Facebook’s shareswere noted to plummet by 5% just hours into the trading (Wilhelm,2014). One concern that was presented by the Wall Street investors,which was seen to possibly stem out from the deal was a possibledilution of both companies (Wilhelm, 2014). Another concern thatemanated from the Wall Street investors was that Facebook had soughtafter buying growth (Wilhelm, 2014). The investors were of theopinion that if Facebook was after amassing user growth, theindication was that the company`s central strengths that revolvedaround engagement and ubiquity were stressed (Wilhelm, 2014).
Anothermarket reaction pointed out to the WhatsApp acquisition as being adesperate move (Harjani, 2014). One market watcher was, in fact,started saying that Facebook overpaid for its acquisition of themessaging start-up (Harjani, 2014). Some industry watchers werecritical in mentioning that Facebook overpaid for WhatsApp as adesperation move (Harjani, 2014).The industry watcher went on tostate that Facebook was so worried that it was losing users and thatthe company was trying to build its user count up by buying companiesthat have substantial numbers of users (Harjani, 2014).
MovingForward: The Facebook-WhatsApp Integration
Fromthe above findings, it is clear that certain critical reasons were atplay when looking at the acquisition.
It is obvious that the reason for the WhatsApp acquisition by Facebook was a strategic move. Facebook was looking for an opportunity for growth, which made sense when looking to partner with a growing start-up like WhatsApp. WhatsApp was a growing messaging application service that would complement Facebook’s slow growth.
Facebook was keen to venture into the emerging markets, which have a broad coverage of the mobile technology. Given that the mobile technology was widely spread out in the emerging markets, acquisition of WhatsApp proved to be vital.
The fact that Facebook paid a hefty premium for the acquisition of WhatsApp is an indicator of the fact that it wanted to maintain market leadership in social networking even if it means taking action before competitors see an enticing opportunity.
Problemsin the Achievement of Acquisition Success
Inthe quest of the acquisition of WhatsApp by Facebook, problems wereencountered. Oppositions in the telecom industry hampered the road tothe WhatsApp acquisition (Rawlinson, 2014). As a matter of fact, thechallenges were mainly directed at the regulators by the opponents ofthe deal. These took note of the following hurdles
The acquisition was challenged by the opponents who wanted the U.S. regulators to push Facebook to reveal its intention of using personal information of WhatsApp Users (Rawlins, 2014).
The acquisition was also challenged by the opponents who feared that the two companies were close competitors, meaning that their integration would interfere with other players in the telecom industry.
Despitethe hurdles that presented themselves in the quest for theacquisition of WhatsApp by Facebook, the transaction was cleared byregulators. Facebook had to clear the doubts in the minds of manycritiques that were concerned by the acquisition. Facebook statedthat it would operate independently from WhatsApp and that it wouldalso respect the privacy of its users (Rawlins, 2014).
Successof the Acquisition Deal
Ideem the acquisition of WhatsApp by Facebook at the time of thisresearch as being a success. Years after the acquisition, WhatsApphas been able to reach the 1billion user base (Yeung, 2016). Thenumber of users has more than doubled the number that was evident atthe time of the acquisition. It is apparent that the mission ofgrowing user connectivity in emerging markets has been realized. Insummary, the decision to acquire WhatsApp by Facebook was a smart,strategic and a successful move in the long haul.
Constine,J. (2015). A Year Later, $19 Billion For WhatsApp Doesn’t Sound SoCrazy. Retrieved April 13, 2017, fromhttps://techcrunch.com/2015/02/19/crazy-like-a-facebook-fox/
Deutsche,A.L. (2015). WhatsApp: The Best Facebook Purchase Ever? RetrievedApril 13, 2017, fromhttp://www.investopedia.com/articles/investing/032515/whatsapp-best-facebook-purchase-ever.asp
Olson,P. (2014). Facebook Closes $19 Billion WhatsApp Deal. Retrieved April13, 2017, fromhttps://www.forbes.com/sites/parmyolson/2014/10/06/facebook-closes-19-billion-whatsapp-deal/#41391265c66c
Frier,S. (2014). Facebook $22 Billion WhatsApp Deal Buys $10 Million inSales. Retrieved April 13, 2017, fromhttps://www.bloomberg.com/news/articles/2014-10-28/facebook-s-22-billion-whatsapp-deal-buys-10-million-in-sales
Harjani,A. (2014). Is Facebook`s acquisition of WhatsApp a desperate move?Retrieved April 13, 2017, from http://www.cnbc.com/2014/02/19/is-facebooks-acquisition-of-whatsapp-a-desperate-move.html
KnowledgeWharton. (2014). Quick Take: What`s Up With Facebook`s WhatsApp Deal?Retrieved April 13, 2017, fromhttps://www.forbes.com/sites/knowledgewharton/2014/02/28/72014/#249ec0256b88
Rawlins,K. (2014). Facebook`s WhatsApp purchase challenged. Retrieved April13, 2017, from http://www.bbc.com/news/technology-26481654
Wagner,K. (2014). Facebook Paid $19 Billion for WhatsApp, Which Lost $138Million Last Year. Retrieved April 13, 2017, fromhttps://www.recode.net/2014/10/28/11632404/facebook-paid-19-billion-for-whatsapp-which-lost-138-million-last-year
Wilhelm,A. (2014). Facebook Stock Falls 5% After Hours Following WhatsAppPurchase [Update: Now Down Only 2.64%]. Retrieved April 13, 2017,fromhttps://techcrunch.com/2014/02/19/facebook-falls-5-in-after-hours-trading-after-announcing-16b-cash-and-stock-to-buy-chat-app-whatsapp/
Yeung,K. (2016). WhatsApp passes 1 billion monthly active users. RetrievedApril 13, 2017, fromhttps://venturebeat.com/2016/02/01/whatsapp-passes-1-billion-monthly-active-users/
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