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

 
 

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

The Singular Secret For A Leader's Success: Self-Awareness
The Singular Secret For A Leader's Success: Self-Awareness
The National Advisory Council of a prestigious west coast business school was asked what single quality they thought would be most valuable for their graduates to acquire as they graduated.  The answer was self-...
 
 
Toby Keith's I Love This Bar & Grill Hit With Tax Warrant
Toby Keith's I Love This Bar & Grill Hit With Tax Warrant
In 2003, country singer Toby Keith went all the way to #1 with his mega-hit, “I Love This Bar.” The incredible popularity of the song inspired a chain of restaurants called Toby Keith’s I Love This Bar & Grill with...
 
 
What If Doctors Could Finally Prescribe Behavior Change?
This guest article is by Sean Duffy, CEO and Co-Founder, Omada Health Three out of four Americans will die of a disease that could be avoided—if only they could re-route their unhealthy habits. A new category of...
 
 
Steve Jobs and Ezra Cornell: Entrepreneurs
Steve Jobs and Ezra Cornell: Entrepreneurs
More and more MBA students are choosing to major in entrepreneurship, rather than the traditional disciplines of finance and marketing. How has entrepreneurship changed over the past century-and-a-half? Or has it...
 
 
 

Latest from the Network

The Singular Secret For A Leader's Success: Self-Awareness
The National Advisory Council of a prestigious west coast business school was asked what single quality they thought would be most valuable for their graduates to acquire as they graduated.  The answer was self-...
Read more on Business Balla
 
Toby Keith's I Love This Bar & Grill Hit With Tax Warrant
In 2003, country singer Toby Keith went all the way to #1 with his mega-hit, “I Love This Bar.” The incredible popularity of the song inspired a chain of restaurants called Toby Keith’s I Love This Bar & Grill with...
Read more on Business Balla
 
What If Doctors Could Finally Prescribe Behavior Change?
This guest article is by Sean Duffy, CEO and Co-Founder, Omada Health Three out of four Americans will die of a disease that could be avoided—if only they could re-route their unhealthy habits. A new category of...
Read more on Business Balla
 
Steve Jobs and Ezra Cornell: Entrepreneurs
More and more MBA students are choosing to major in entrepreneurship, rather than the traditional disciplines of finance and marketing. How has entrepreneurship changed over the past century-and-a-half? Or has it...
Read more on Business Balla
 
Private Equity's New Macro Challenges
For decades, private equity (PE) firms made money by focusing on the microeconomics of businesses and letting the macro conditions take care of themselves. While investors focused on industry dynamics and company...
Read more on Business Balla
 
Potential New Treatment for Alcoholism: Ezogabine
A relatively new anti-seizure drug may help alcoholics quit drinking, according to a new study. Researchers at Boston University School of Medicine found that ezogabine had the potential to reduce alcohol consumption...
Read more on Business Balla
 
Rating Restaurants On How Socially Responsible They Are
Gerald Mitchell wants to change behavior–specifically, to persuade consumers to patronize socially responsible restaurants. He aims to do that through SWICH, a social enterprise site now in beta that lists and rates...
Read more on Business Balla
 
Move For Business Or Stay Around For Mom's Sake?
Janette feels completely torn. Her mother, who lives an hour away, is ill and refuses home help.  Janette (name changed to protect her identity) visits weekly and does a lot of chores for her.  She feels a sense of duty...
Read more on Business Balla
 
Bill Cassidy Providing Emergency Assistance To Wealthy Televangelists
Bill Cassidy, Republican Congressman from Baton Rouge, LA and physician was in the news last week as he provided emergency treatment to a fellow passenger on a Southwest Airlines flight.  He may well have gained one...
Read more on Business Balla
 
GM Off the Hook as Judge Quashes Demand for "Park-It" Order
General Motors Co. finally caught a break in a Texas court its ongoing ignition safety snafu. GM has already been forced it to recall 2.6 million vehicles with defective ignition switches linked to at least 13 deaths....
Read more on Auto Balla
 
 
Auto Balla Sexy Balla Sport Balla TV Balla Politics Balla Movie Balla Apple Balla Business Balla Ad Balla Celebrity Balla