App-Propriate Price?

Is this how the bull ends? Not with a bell, but with a buyout?

Facebook’s purchase of WhatsApp for $4 billion in cash and $15 billion in stock is a marker. It’s the largest tech deal since Time Warner’s $124 billion purchase of AOL in 2001. Or Verisign’s $15 billion purchase of Network Solutions in 2000. Or Telecom Italia’s €30 billion acquisition of Tin.it, also in 2000. All these deals resulted in mult-billion dollar write-downs a few years later. Is it different this time?

I’d never heard of WhatsApp until this deal was announced. The 450 million WhatsApp users pay $1 / year to text message from their smartphones without paying a carrier. The deal faces a lot of skepticism from analysts and pundits, but investors have pushed Facebook’s shares up almost 10% since it was announced.

Some say the eye-popping price (1000 times revenues!) can be justified because it solidifies Facebook’s position in mobile technology and adds a non-advertising revenue stream. Zuckerberg claims that WhatsApp is actually worth a lot more to them than $19 billion.

Well, duh! It had better be worth more than he paid for it. Because if it isn’t, he’ll have to write it down. And Facebook stock, now trading at 21 times revenues, will also be written down. And he won’t have hot shares with which to lure newly-minted Ph.D.s and buyout targets.

It takes a lot of discipline to run a public company—discipline not to let $10 billion in cash burn a hole in your pocket; discipline not to let today’s heady stock price tempt you into issuing more shares. Zuckerberg is a bright guy who turned social networking a global phenomenon. But running a public company is different than running a private company which is different than creating a startup.

History is littered with overpriced acquisitions that signaled a euphoric “price doesn’t matter” attitude. Let’s hope the bull doesn’t stop running just because a 29-year old CEO got hungry for a new app.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2014-03-03T10:35:34+00:00 March 3rd, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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