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, 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

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