• Author / Uploaded
• vinod

Citation preview

Case Study Analysis 1. Do you believe Facebook paid too much for WhatsApp? Why? Be specific in identifying the assumptions underlying your argument. No, I do believe Facebook did not pay too much for WhatsApp. The amount paid was justifiable with regard to the market value of WhatsApp at the time of acquisition. While WhatsApp was acquired at $21.8 billion by Facebook, its market value was $30 meaning that it was acquired at a less price than its value. This is against the assumption of mergers and acquisition where it is assumed that a firm should be acquired at its market value. 2. How might existing Facebook shareholders be hurt by the deal？

What do the

current shareholders have to assume about future earnings growth to benefit from the deal? The existing Facebook shareholders might be hurt by the deal because all outstanding shares of WhatsApp stock were exchanged for Facebook class A common stock. This means that they were given a higher priority and therefore they would be entitled to earnings first before other shareholders in class B are considered. Secondly, the deal saw the shares of Facebook dropping by 5%, meaning that the original shares of Facebook could incur losses if they were to sell their shares. Finally, increasing the number of shareholders reduces earnings per share and the dividends declare. On the other hand, the current shareholders should assume that the future earnings of the company will grow or increase for them to benefit from the deal. That is the price stock should rise above 65.27 per share for them to realize gains on stock. 3. Given the nature of technology, do you believe it is possible for one firm do dominant the mobile messaging space? Explain your answer.

I don’t believe it is possible for one firm to dominate the mobile messaging space, given the nature of technology. Technological development and innovations differ from one another significantly. The resources such as capital, skill personnel, and management required to implement and maintain different forms of mobile messaging differ, making it difficult for one firm to control all of them. One firm cannot have all the requirements to implement and maintain different mobile messaging services. 4. Do you believe that Facebook is justified in its aggressive acquisition strategy? What are the assumptions implicit in this strategy? Are they credible? Why I do believe the aggressive acquisition strategy by Facebook is justifiable. The reason is that, if Facebook does not take the action, it will be rigged out of the business. For instance WhatsApp had 450 million monthly active users after 4 years as compared to 150 million users 4 years after startup. Furthermore it was experiencing 1 million subscribers on a daily basis. This means that it was going to dominate the market hence rigging out many firms inclusive of Facebook. The assumption implied in the strategy is the notion that high risk investments are associated with high returns, therefore investing more to acquire WhatsApp would result in increased earnings. Besides that, acquisition increases the number of shareholders in the firm which is assumed that more investors would invest in the company hence increasing the earnings meaning that it is credible. 5. Describe how Facebook has chosen to deal with culture differences that may exist between it and the firm it acquires? What are the advantages and disadvantages of Facebook’s approach to dealing with culture difference? Facebook is maintaining culture of the firm acquired by maintaining features and the way of operation. For example it is diversifying its business model by keeping WhatsApp ad free with a nominal $1 per year subscriber fee as it was before it was acquired. The advantage

of the system is that it helps to maintain a good rapport not only with the original owners but also with the shareholders acquired from the firm. However, it is difficult and challenging on the side of the acquirer to run the firm in the older way. It might attract extra costs which might not have been incurred if the old culture is absconded. 6. What alternatives to acquisition did Facebook have in dealing with Why was acquisition the preferred option? Be specific. Facebook had an alternative to enter into a partnership with WhatsApp. This could have seen the two firms’ collaborating and working together to render some mobile messaging services. Acquisition was a preferred option because other firms like goggle had already shown an intention to acquire it. Besides that, Facebook wanted to increase its market share.