Mark McSherry: Facebook is paying a fortune for a tiny start-up firm. Why?
US Voice: That reminds me so much of the strategies of the dotcom era, it's giving me the chills
Friday 21 February 2014
It's hard not to be sceptical about the $19bn (£11bn) price Facebook is willing to pay for WhatsApp, even allowing for the fact that Facebook would use $15bn of funny money – Facebook stock – to pay for the acquisition.
Frankly, even the $4bn cash portion Facebook is willing to pay seems a very high price for WhatsApp, a company which employs just over 50 people and provides little information on any actual revenue that it makes.
To put it another way, Facebook is willing to pay roughly the stock-market value of the giant Sony Corporation for a tiny start-up firm with good potential.
There is no denying that WhatsApp is hugely popular and could drive growth for Facebook, but it is hard not to conclude that the $19bn price is from another planet. That planet is called Silicon Valley.
"Trust us" seems to be Facebook's answer to the scepticism of many of its shareholders about the deal.
If you drink the new age, dot.com Kool Aid sold in Silicon Valley, the people who run these companies and the "bankers" who advise them are geniuses and the rest of us are just not smart enough to understand the "new paradigm" that is their world of novel valuations and metrics.
Don't we know that hopelessly old-fashioned accounting methods of profits, losses and revenues just don't apply in this simulated reality that's a bit like The Matrix movie?
Analysts watching the deal said that if you accept a metric called a "per user" price, Facebook is paying roughly $40 per user for WhatsApp, not too different from what other social-media companies have been acquired for in recent years.
But can you really afford to hang your jacket on that?
Some analysts are not convinced.
"There really is no revenue in WhatsApp," said Rob Enderle, principal analyst at Enderle Group on CNBC.
"If you were to price this company [WhatsApp] based on the money that they are making, you wouldn't pay a fraction of what it is they [are willing to] pay."
So what is the price based on? Potential growth for Facebook?
Analysts said that teenagers are using WhatsApp because they need a new, virtual space where they can goof off out of sight of their parents, who are on Facebook. So Facebook, in order to grow, needs to be in that virtual space.
Also, WhatsApp is much stronger than Facebook Messenger outside the United States and has attracted many young users away from Facebook.
These are good arguments for sure, but are they worth $19bn?
The stock market can't make up its mind.
Since the deal was announced late on Wednesday, Facebook has lost billions of dollars in stock-market value as its share price tumbled. It recovered last night to end up 2 per cent at $69.63.
Shareholders, the owners of the company, are being asked to take the risk, and their interests just might be diluted by this controversial deal.
However, for the true believers among the analysts, the rest of us just need to wise up. It's a no-brainer, they say.
Take the Deutsche Bank analyst Ross Sandler, for instance: "Facebook continues to demonstrate savvy-ness beyond its years as it pivots its business model, footprint and strategy to mobile."
Another, the Macquarie Equities Research analyst Ben Schachter, said: "While we don't expect messaging to be a meaningful near-term or even long-term revenue driver, the real value could be the evolution of the platform to incorporate new functionality such as payments, app distribution, social features."
Rob Enderle, principal analyst at Enderle Group, disagrees.
"They [Facebook] are so worried they are bleeding users that they are trying to get their user count up by buying companies that have users," he said.
"But that reminds me so much of some of the strategies of the dotcom era, it's actually giving me chills."
At least two brokerages downgraded recommendations on Facebook's stock to "hold" – but the majority of analysts, at least for now, appear to be giving Facebook the benefit of the doubt and remain positive on the stock.
Well, either they drink the magic Kool Aid, or they really are just a lot smarter than the rest of us.
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