360° Coverage : Three Smart Lessons From Facebook's Purchase Of WhatsApp

2 Updates

Three Smart Lessons From Facebook's Purchase Of WhatsApp

Feb 24 2014, 5:35pm CST | by

Facebook is acquiring WhatsApp, a company with at most $300M revenues, and 55 employees, for $19billion. That’s billion – with a “b.” An astonishing figure that is second only to HP’s...

Filed under: news

 
 
 

27 weeks ago

Three Smart Lessons From Facebook's Purchase Of WhatsApp

Feb 24 2014, 5:35pm CST | by

Facebook is acquiring WhatsApp, a company with at most $300M revenues, and 55 employees, for $19billion.

That’s billion – with a “b.” An astonishing figure that is second only to HP’s acquisition of market leader Compaq, which had substantial revenues and profits, as tech acquisitions.  $19B is 13 times Facebook’s (not WhatsApp’s) entire 2013 net income – and almost 2.5 times Facebook’s (again, not WhatsApp’s) 2013 gross revenues!

On the mere face of it this valuation should make the most dispassionate analyst swoon.  In today’s world very established, successful companies sell for far lower valuations.  Apple is valued at about 13 times earnings.  Microsoft about 14 times earnings.  Google 33 times.  These are small fractions of the nearly infinite P/E placed on WhatsApp.

There is a leadership lesson offered here by CEO Zuckerberg’s team that is well worth learning.

1. Move fast to avoid irrelevancy.

Irrelevancy can happen remarkably fast.  True in any industry, but especially in digital technology. Examples: Research-in-Motion/Blackberry.  Motorola.  Dell.  HP.  All lost relevancy in months, and are struggling.  (For those who want non-tech examples think of Circuit City, Best Buy, Sears, JCPenney, Abercrombie and Fitch.)  Each of these companies was an industry leader that lost its luster, many of its customers, a big chunk of its employees and much of its market valuation in months when the company missed a market shift.

In a very short time market trends reduced the value of each company’s historical success formula, leaving investors, as well as management, wondering how it was going to compete.

Facebook is not immune to changing market trends.  Although it has been the benchmark for social media, it only achieved that goal after annihilating early leader MySpace.  And although Facebook was built by youthful folks, trends away from using laptops and toward mobile devices have challenged the Facebook platform.  Simultaneously, changing communication requirements have altered the use, and impact, of things like images, photos, charts and text.  All of these have the potential impact of slowly (or not so slowly) eroding the value (which is noticeably lofty) of Facebook.

Most leaders address such challenges by launching new products to leverage the trend.  And Facebook did that.  Facebook managers and technologists not only worked on making the platform more mobile friendly, but developed Facebook’s own platform apps for photos, messaging and all kinds of new features.

But, and this is critical, external companies did a better job.  Two years ago Instagram emerged as a leader in image sharing.  And WhatsApp developed a superior answer for messaging.

Historically, we trained leaders to say “we need to find a way to beat these new guys.”  Management would make it hard to integrate new solutions with their dominant platform in an effort to block their growth.  Management would spend hugely on marketing and branding to try overcoming the emerging leader’s building brand position.  Often management would file intellectual property litigation in an effort to cause short-term business interruption and threaten viability.  The entrenched leader might even try hiring the emerging company’s tech leader away to stop development.

Often answers come from the market, not internal efforts.

All of these actions were efforts to defend & extend the early leader’s market position.  Even though the market is shifting, and trends are developing externally from the company, leadership will tend to look inside for an answer.  Leaders will often ignore or downplay the trend, disparage the competition, keep promising improvements to historical products and services and blanket the media with PR flagging stated superiority.

But, as the list (above) of companies that lost relevancy demonstrates, this rarely works.  In a highly interconnected, fast-paced, globally competitive marketplace customers go where they want.  Quickly.  Often leaving the early leader with a management team (and Board of Directors) scratching its head and wondering how it lost so much market position, and value, so quickly.

Hand it to Mr. Zuckerberg’s team.  Instead of ignoring trends in its effort to defend & extend its early lead, they reached out and brought the leader to them.  $1B for Instagram was a big investment, especially so close to launching an IPO.  But, it kept Facebook relevant in mobile platforms and imaging.

Making a nosebleed-creating $19B deal for WhatsApp focuses on maintaining relevancy

WhatsApp already processes almost as many messages as the entire telecom industry.  It has 450million users with 70% active daily, which is already 60% the size of Facebook’s daily user community (550million.)  By bringing these people into the Facebook corporate family it assures Facebook of continued relevancy as the market shifts.  It doesn’t matter if these are the same people, or different people.  The issue is that it keeps Facebook relevant, rather than losing relevance to a competitor.

2. Giving an acquisition independence is critical

How will this all be monetized into $19B?  The second brilliant leadership call by Facebook is to not answer that question, because nobody really knows.

Facebook didn’t know how to monetize its early leadership in users, but management knew it had to find a way.  Now the company has grown from practically no revenues in 2008 to almost $8B in just 5 years.  (Does your company have a plan to add $8B/year of organic revenue growth by 2019?)

So just as Facebook had to find its revenue model (which it is still exploring,) Zuckerberg’s team allows the leadership of Instagram and WhatsApp to remain independent, operating in their own White Space, to grow their user base and learn how to monetize what is an extraordinarily large group of happy folks.  When looking to grow in new markets, and you find a team with the skills to understand the trends, it is independence rather than integration that makes the most sense organizationally.

3. Create, and use, your own currency

$19B is a huge amount of money.  Unless you don’t really spend $19B.  Facebook has the blessed ability to print its own currency.  Private money that it can use for acquisitions.  As long as Facebook has a very high market valuation it can make acquisitions with shares, rather than real money.

In the case of both Instagram and WhatsApp the acquisition used a mix of cash, Facebook stock and restricted Facebook stock for employees.  The latter two of these three items are not real money.  They are simply pieces of paper giving claims to ownership of Facebook, which itself is valued at 22 times 2013 revenue and 116 times 2013 earnings.  The price of those shares are all based on expectations; expectations which now require the performance of Instagram and WhatsApp to make happen.

By making acquisitions with Facebook shares the leadership team is able to link the newly acquired managers to the same overall goals as Facebook, while offering an extremely high price but without actually having to raise any money – or spend all that money.

All companies risk becoming irrelevant.  New technologies, customer behavior patterns, regulations, inventions and innovations constantly challenge old success formulas.  Most leaders fall into a pattern of trying to defend & extend their old business in the face of market shifts, hastening the fall into irrelevancy.  Or they try to acquire a new business, then integrate it into the old business which strips away the new business value and leads, inevitably, to irrelevancy.

The leaders of Facebook are giving us a lesson in an alternative approach.  (1) Recognize the market shift.  Accept it.  If there is a better solution, rush toward it rather than ignoring it.  (2) Bring it into the company, and leave it independent.  Eschew integration and efforts to find “synergy.”  (You never know, in three years the company may need to be renamed WhatsApp to reflect a new market paradigm.)  (3) And as long as you can convince investors that you are maintaining your relevancy use your highly valued stock as currency to keep the company moving forward.

These are three great lessons for all leadership teams.  And I continue to think Facebook is the one stock to own in 2014.

Connect with me on LinkedIn, Facebook  and Twitter.

Links:

Why Facebook is the one stock to own 2014

How Facebook beat MySpace and the lesson for all leaders

Facebook as a model of disruptive competition in 2011

The case/recommendation for buying Facebook in June, 2012 shortly after IPO

Source: Forbes Business

 
Update
2

4 days ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashing the workforce of 2 ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

5 days ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH17" hi ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

No link between Ebola outbreaks in West Africa, DRC : WHO
Geneva, Sep 3 (IANS) The World Health Organisation Tuesday said the outbreak in Democratic Republic of Congo (DRC) is "a distinct and independent event", with no relationship to the epidemic in West Africa.
 
 
US CDC calls for global response against Ebola
Washington, Sep 3 (IANS/EFE) The head of US Centers for Disease Control and Prevention (CDC) Tuesday warned of the risk that the Ebola outbreak could get out of control without a greater worldwide response.
 
 
US doctor tests positive for Ebola in Liberia
Washington, Sep 3 (IANS) An American missionary doctor working in Liberia has tested positive for the Ebola virus, his organisation SIM USA announced Tuesday.
 
 
IS video shows beheading of second US journalist
Washington, Sep 2 (IANS) Days after the beheading of American photojournalist James Foley, Sunni militant group Islamic State (IS) has posted a video showing the beheading of another kidnapped American journalist Steven Sotloff, CNN reported.
 
 
 

Latest from the Network

Miltos Yerolemou joins 'Star Wars Episode VII' cast
Los Angeles, Sep 3 (IANS) Miltos Yerolemou, who was seen as swordsman Syrio Forel in TV show "Game of Thrones", joins the cast of "Star Wars Episode VII". Harrison Ford, Carrie Fisher and Mark Hamill return as Han...
Read more on Celebrity Balla
 
No link between Ebola outbreaks in West Africa, DRC : WHO
Geneva, Sep 3 (IANS) The World Health Organisation Tuesday said the outbreak in Democratic Republic of Congo (DRC) is "a distinct and independent event", with no relationship to the epidemic in West Africa. Based on...
Read more on Business Balla
 
US warplanes drop leaflets on Iraqi city
Baghdad, Sep 3 (IANS/EFE) US warplanes Tuesday dropped thousands of leaflets on the northern Iraqi city of Mosul, urging residents to keep clear of places occupied by the Islamic State (IS) extremist group that overran...
Read more on Politics Balla
 
US CDC calls for global response against Ebola
Washington, Sep 3 (IANS/EFE) The head of US Centers for Disease Control and Prevention (CDC) Tuesday warned of the risk that the Ebola outbreak could get out of control without a greater worldwide response. "This is...
Read more on Business Balla
 
Don't have a perfect body: Charlize Theron
Los Angeles, Sep 3 (IANS) Actress Charlize Theron says she doesn't have an ideal figure, but is happy with the way her body looks. The actress features on the cover of Modern Luxury's September 2014 issue and looks...
Read more on Celebrity Balla
 
Kate Hudson is 'basically married'
Kate Hudson says she and Matthew Bellamy are ''basically married.'' The 35-year-old actress, who has son Bingham, three, with the Muse frontman, 36, admits they're in no rush to plan to a wedding and she rarely wears...
Read more on Celebrity Balla
 
Cee Lo Green's reality show is axed
Cee Lo Green's reality TV series has been axed. TBS announced on Tuesday (09.02.14) that the 'Forget You' hitmaker's show, 'The Good Life,' which focused on his attempts to juggle his careers as a producer, recording...
Read more on Celebrity Balla
 
Chris Martin spends weekend with Gwyneth Paltrow
Chris Martin and Gwyneth Paltrow spent the weekend together in the Hamptons. The former couple, who announced they were ''consciously uncoupling'' in late March after 10 years of marriage, reunited at their home in the...
Read more on Celebrity Balla
 
Mali mine blast kills four UN peacekeepers
Bamako, Sep 3 (IANS) Four United Nations peacekeepers were killed and 15 others injured after their vehicle hit a landmine in Mali Tuesday, security sources said. The UN vehicle was hit by a landmine when the...
Read more on Politics Balla
 
Kate, Cara new faces of Burberry's latest fragrance
London, Sep 3 (IANS) Supermodels Kate Moss and Cara Delevingne have been roped in as the new faces of Burberry's latest fragrance. The models are pictured in the campaign for the label's latest scent My Burberry, shot...
Read more on Celebrity Balla