The file attached is a case study about the acquisition about facebook and whatsapp. Could you help answer the questions at the bottom depending on the materials above?

FIN 648: Mergers & Acquisitions: M&A: End-Term: Case Study WHAT'S UP? FACEBOOK BUYS MESSAGING STARTUP WHATSAPP FOR $21.8 BILLION. Case study objectives: to illustrate the role of factors external to a firm in developing the firm's business strategy how maintaining competitive advantage is transient, especially in businesses subject to rapid technological change how overvalued acquirer shares can contribute to overpaying for a target firm Talk about a takeover had been a underway since early 2012 when Facebook founder and CEO Mark Zuckerberg contacted Cancun co-founder and CEO of mobile messaging company WhatsApp about the possibility of a deal. Koum had long been cool to the idea of selling his company because that smacked of his losing control of WhatsApp. The discussions continue throughout the year and into 2013 on an informal basis. Eventually Zuckerberg was able to entice Koum to accept an offer that essentially made WhatsApp's 55 employees enormously wealthy, seemingly without having to alter their business model in any way. While the deal clearly transfers ownership to Facebook, it does not at least from the outside appeared to cede control. Mark Zuckerberg refers to the acquisition of WhatsApp as a partnership reinforcing the notion of Koum's continuing independence. WhatsApp is a mobile messaging service for smartphones that lets users chat with their phone contacts, both one on one and in groups. Unlike Facebook, it allows users to communicate narrowly rather than broadcast information to large numbers of \"friends\". It allows people to send text, photos, videos, and video voice recordings over the internet without incurring charges for international text messages and phone calls. Wireless carriers are bypassed and therefore no fees are required. While the first year is free, each user is required to pay $1 annually thereafter. Unlike Facebook, 1 WhatsApp has no ads. WhatsApp was founded in 2009 by Ukrainian born Jan Koum and American Brian Acton. 55% of its users are from Western Europe, Mexico, India, Brazil, and the United States with the remainder residing in emerging countries. At the time the deal was announced, WhatsApp had 450 million monthly active users as compared to Twitter's 241 million users. WhatsApp's 450 million uses after 4 years compared to Facebook's 150 million users 4 years after startup. WhatsApp has seen its users double since 2012 to its current level, making the service more popular than Twitter, which at the time of Facebook's acquisition of WhatsApp had a market value of 30 billion. 70% of WhatsApp users log on to the service at least once a day as compared to 61% of Facebook users. WhatsApp at the time of the deal's announcement was growing at the rate of 1 million registered users daily. WhatsApp vision is to make messaging accessible to anyone regardless of what phone they own, where they live or how much money they make. WhatsApp received $10 million in funding from Sequoia Capital in 2011 and despite modest annual revenue of 20 million in 2013, it is profitable. Jan Koum, CEO and founder who owns 45% of the startup, picked the name because it sounded like \"Whats up\". Having grown up in Ukraine when it was still part of the now-defunct Soviet Union, Koum remembers the country's repressive secret police and has an understandable aversion to allowing users of his company's service to be tracked electronically. The announcement by Facebook that it had reached an agreement to acquire WhatsApp stunned industry observed and investors alike as it represented the largest amount paid for an interest firm in history. At $21.8 billion (including $3 billion in restricted stock units) the deal represented the biggest acquisition Facebook has ever done and represented almost 10% of its market value. For comparative purposes, Google's biggest deal is Motorola Mobility for which it paid $12.5 billion (which it sold less than 3 years after it had acquired the business); in its biggest deal, Microsoft paid 2 $8.5 billion for Skype. Apple had never done a deal valued at more than $1 billion. The terms of the deal called for all outstanding shares of WhatsApp stock and options to be cancelled in exchange for $4 billion dollars in cash and 183,865,778 shares of Facebook Class A common stock. The Class A common stock was valued at $12 billion, based on the average closing price of the 6 trading days preceding February 18, 2014 of $65.27 per share. In addition Facebook granted 45,966,444 restricted stock units (RSUs) to WhatsApp employees worth $3 billion based on the same price average price per share. The RSUs would vest over the 4 years following the closing date. As of February 17, 2014, Facebook had 2,551,654,996 Class A and Class B shares outstanding plus 139 million shares consisting of unvested restricted stock units, which when converted would count on the firm's shares outstanding. The increase in Class A shares to pay for the acquisition constituted 7.9% of Facebook's total outstanding shares, including unvested RSUs. Facebook also agreed to pay a $1 billion breakup fee if the deal failed to close. Shocked by the price paid for the deal, Facebook shares fell 5% to $64.70 on the news. Why was Facebook willing to pay so much for WhatsApp? The overarching reasons seem to be its spectacular growth potential, the demographic it attracts, and to preclude other from acquiring it. Mark Zuckerberg has stated his vision for Facebook is to make the world more open and connected. How? By giving people the power to share whatever they want and to be connected to whatever they want no matter where they are. This requires building the best and most ubiquitous mobile product, a platform where every app that is created can support social interaction and enable people to share, and to build Facebook into one of the world's most valuable companies. While Facebook dominates the social network space in which users are able to share everything they want others to know, Facebook also wants to 3 dominate how people communicate. The acquisition of WhatsApp illustrates Mark Zuckerberg's understanding that people want to communicate in different ways: sometimes broadly through Facebook and sometimes narrowly through WhatsApp's mobile messaging capability. In the past, Facebook was essentially a website and a mobile app which enables users to indulge (at least theoretically) all their online needs. However, Facebook's efforts to penetrate the mobile messaging market in recent years have largely failed. Facebook solely needed a platform to make inroads in the mobile messaging market. Enter WhatsApp with its frenetic growth. WhatsApp's spectacular growth rate is made more attractive due to the demographic it attracts: teenagers and young adults were increasingly using WhatsApp for online conversations outside of Facebook. This trend has accelerated as Facebook has become popular among their parents, grandparents, and even their bosses at work. This deal is a bet on the future as Facebook seeks to sustain user growth while recovering the young users it has been losing and retaining its current 1.33 billion user base. CEO Mark Zuckerberg's philosophy seems to be to attract users first and then worry about profitability later. The presumption seems to be that rapid growth leads to long-term profitability. While this has been true in some cases, this logic has been disastrous in other instances. Examples of this logic paying off include Google buying YouTube for $1.6 billion in 2006 when it was widely criticized; now it has become the dominant video platform on the web. Similarly when Facebook acquired Instagram for $1 billion in 2012 it supposedly overpaid, but today Instagram appears to be thriving and beginning to sell advertisement. But the same reasoning would have applied to the dot.com boom of the late 1990s that became the dot.com but as firms used overvalued stock to overpay for growth through acquisition. Because they paid too much they were never able to earn the rates of return their investors required to remain invested or for new investors to buy their shares. The end result was that 4 many internet startups saw the value of the shares plummet while many others went bankrupt. In addition to providing an engine for growth of Facebook and for staunching the loss of young users, the other major justification for purchasing WhatsApp seems to be to keep it out of the hands of its archrival Google. Reportedly, Google had made an offer to buy WhatsApp in 2013. In an effort to establish social media monopoly, Facebook seems to be prepared to buy out competitors in finds threatening. Facebook has struggled to gain traction in messaging. After being rebuffed by Snapchat, whose messages vanish within 10 seconds, in 2013 when it offered a reported $3 billion, Facebook turned to develop Facebook Messenger its chat platform, which is popular with users, but recent attempts to create its own direct messaging service have failed. Facebook poke, which was developed to compete with Snapchat has few users. A new feature added to Instagram in 2013 called Instagram Direct allows people to message each other on the service, but this seems to have gained few users as well. Market value per user is a common metric for valuing businesses without significant earnings but which show significant user growth. The presumption is that sustained user growth will eventually result in future earnings. Using this metric, Facebook paid about $48 per existing user ($21.8 billion/ 450 million users) for WhatsApp verses about $33 per user ($1 billion/ 30 million users) for Instagram. Like WhatsApp, Instagram has also been a hit with teens helping Facebook to reduce attrition among teenage users. Facebook can continue to pay such prices to acquire firms as long as it remains solidly profitable and shows substantial and sustainable growth potential to support its share price. At the time of this deal, Facebook had net income of $523 million on revenue of $2.6 billion for the fourth quarter of 2013, an approximate after tax margin of 20%. Moreover, with about 49% of the firm's ad revenue coming from mobile advertising, the firm seemed positioned to exploit the accelerating shift to mobile communication. 5 In an acknowledgement that people are using many different apps to communicate, the 10-year old Facebook is now pursuing a \"multi-app\" strategy. Facebook has become a medium conglomerate similar to Disney owning all the best brands and serving all demographics simultaneously. It plans to operate its brands independently to see which one gets the largest and does not want to interfere with the formula that has made these brands popular. Especially on mobile phones, the firm intends to splinter into many smaller, more narrowly focused services, some of which may not even carry Facebook's brand and may not require a Facebook account to use. The firm established an internal organization called Creative Labs in 2014 to enable its software engineers to focus on designing new innovative apps. WhatsApp brand will be maintained and the business operated large autonomously from Facebook. Its headquarters will remain in Mountain View California. Jan Koum will join Facebook's Board of Directors, WhatsApp core messaging product and Facebook's existing messenger app will continue to operate as stand-alone businesses. Is WhatsApp's culture compatible with Facebook? \"No ads, no gimmicks, no games\" is WhatsApp's credo. Contrary to Facebook's business model, WhatsApp rejects advertising as a means of making money. At least at this point, Facebook has said that it does not think that advertising is the right way to monetize messaging. Facebook must at some point find a way to create a more profitable WhatsApp business if it is to recover the huge premium it paid for the business. Facebook continues to face many challenges. How long can it continue to buy up competition? It won't be long before another competitor arrives on the scene. Line, a WhatsApp competitor popular in Asia, is considering going public through an IPO. Kik messenger, another popular mobile messaging company, is often mentioned as a takeover target. Such startups benefit from the proliferation of web-connected smartphones and the increased availability of such things as cloud computing which enable young firms to gain access to inexpensive computer 6 server capacity capable of supporting exploding internet-based communication. For example, the number of mobile messages handled daily by WhatsApp's 35 software engineers is almost equal to all the messages transmitted by the world's major telecommunication companies. With most of WhatsApp users outside the United States, Facebook has an opportunity to reach more people. But this can also result in increased competition and tension with the world's largest telecommunication operators such as AT&T in the United States and Deutsche Telekom in Germany would charge users to send text messages. While Facebook and WhatsApp can collaborate to get more users from emerging markets, new barriers may arise. In China, Facebook is banned and social messaging is dominated by WeChat. Line dominates Japan and Akao is the most popular messaging system in South Korea. WhatsApp is allowed in China but does not rank in the top 5 social networking applications. The proliferation of social networking firms is a mixed blessing for the large telecommunication carriers which support the Internet infrastructure. While the carriers need Facebook, Twitter, and YouTube to lure subscribers to their data plans, these services have begun to collect an increasing share of the money spent on services used by mobile device users. When someone buys an online game, the money goes to the games creator and the app store operator (e.g., Apple). Ad revenue generated by increase traffic goes to Google's search engine and to Facebook's social network. Services such as WhatsApp and Microsoft Skype erode a major source of mobile phone company revenue: voice and text messaging. The major carriers are seeking approval from regulators to allow more cross-border mergers to compete with the global growth of the social network firms. The carriers also are asking regulators to allow them to charge different rates for different speeds and different levels of service. Other carriers, such as Royal KPN of Netherlands, are introducing services similar to WhatsApp. By operating as a media holding company consisting of popular brands, Facebook is not just diversifying is product portfolio, it is diversifying 7 its business model by keeping WhatsApp ad free with a nominal $1 per year subscriber fee. In doing so, how will it make money in the future to support its ever increasing overhead and support infrastructure? How will it really realize synergies among the various brands? Will issues of control arise causing the eventual loss of key talent from Facebook? Can Facebook's effort to design innovative apps through Creative Labs be successful? Its most imaginative engineers with \"game-changing\" ideas for apps could be motivated to leave the company to develop these apps on their own in an effort to reap 100% of the resulting rewards. Furthermore, by producing more apps separate from its main app, Facebook could be limiting its ability to promote new innovative features to its core users who focus primarily on photo sharing and who may not be exposed to stand alone apps. Whatever the answer to these questions, we can be sure that the growth of the Internet will spawn new innovations challenging the survivability of current competitors. The process of \"creative destruction\" in which current businesses give way to new businesses with new ways of doing things will continue to change the competitive landscape for years to come. What also it is evident is that the pace of creative destruction is accelerating. Questions: 1.Do you believe facebook paid too much for whatsapp? Why? Be specific in identifying the assumptions underlying your argument. 8 2.How might exsiting facebook shareholders be hurt by the dealWhat do the current share holders have to assume about future earnings growth to benefit from the deal? 3.Given the nature of technology, do you believe it is possible for one firm do dominant the mobile messaging space? Expain your answer. 4.Do you believe that facebook is justified in its aggressive aquisition strategy? What are the assumptions implicit in this strategy? Are they credible? Why 5.Describe how facebook has choosen to deal with culture differences that may exist between it and the firm it acquires? That are the advantages and disadvantages of facebook's approach to dealing with culture difference? 6.What alternatives to acquisition did facebook have in dealing with Why wa acquisition the preferred option? Be specific. 9