Questions
CASE = FACEBOOK buys WHATSAPP
Version: 5/8/17
This case asks you to analyze Facebook’s 2014 acquisition of WhatsApp from strategic, financial statement, and market valuation perspectives. [FB = Facebook, WAPP = WhatsApp]. Note: You may use any publicly available information information to answer these questions (other than an answer key from from someone or somewhere!). That is, you may use www.sec.gov or Yahoo! Finance, Wikipedia, Facebook’s newsroom, or o r the Internet in general.
Q0.
Who is doing the FSA on Facebook’s acquisition of WhatsApp? WhatsApp? Why is he/she he/she doing FSA? (1 pt)
Susan Shaw o Had a number of diverse interests, investing being one of them She wants to decide if investing in facebook is a good idea
Q1a. At the time of the case, what is Facebook’s mission? What about today? (1 pt) At time of the case: Our mission is to give people the power to share and make the world more open and connected… Our top priority is to build useful and engaging products that enable people to connect and share through mobile devices and personal computers. We also help people discover and learn about what is going on in the world around them, enable people to share their opinions, ideas, photos and videos, and other activities with audiences ranging from their closest friends to the public at large, and stay connected everywhere by accessing our products Today: Facebook’s mission is to give people the power to share and share and make the world more open and connected. People use Facebook o to stay connected with friends and family, o to discover what’s going on in the world, and o to share and express what matters to them. Going forward, Zuckerberg said, the company will consider what happens after it connects people — and try to manage those effects for the better. “In times like these,” Zuckerberg wrote, “the most important thing we at Facebook can do is develop the social infrastructure to give people the power to build a glo bal community that works for all of us.”
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Q1b.
Q2a.
Q2b.
If you’re the CEO of a tech firm that has acquired the social/cultural status of a company like Facebook, what worries you financially as you think about the future? (1 pt)
Fluctuations in revenue and earnings year to year Threats by other companies, especially if technology being made obsolete o Fear of being disrupted Employees at the company becoming too complacent with the company’s current situation What business is WhatsApp in? (1/2 pt) The Company provides a cross-platform communication application, which allows users globally to exchange unlimited text and multimedia (audio, video, and photo) messages without having to pay for short messaging service (SMS) fees. Users can send messages via WhatsApp application using existing mobile data connections or Wi-Fi. The Company provides messaging services through the WhatsApp Messenger application. The users pay a subscription fee for the messaging service that the Company offers in certain countries. The Company derives revenue from two sources: (1) term subscription revenue, which is comprised of subscription fees from users utilizing the WhatsApp messaging service through their mobile devices over a subscription period of one year, three years, or five years; and (2) perpetual subscription revenue from users utilizing the WhatsApp messaging service on mobile devices that have perpetual subscription periods. What does WhatsApp do to differentiate itself from its competitors in terms of providing value to its customers? (1/2 pt) No Ads! No Games! No Gimmicks! Cross-platform support: Users can communicate through one-to-one messages, create groups, or broadcast lists. Currently, WhatsApp supports iPhone, BlackBerry (and BB10), Android, Windows, Nokia S40, and Symbian platforms. LOTS of users Until recently, the user subscription fee was only $1 a year (in the US). In other countries, it’s even lower.
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Q2c.
Q3a.
Q3b.
List four reasons (at least 3 must be sensible) why Facebook bought WhatsApp. (2 pts) WhatsApp and Facebook can make each other better o Cross sharing of data display more relevant ads on FB o Cross sharing of users’ demographic information WhatsApp allows facebook to diversify its business models and portfolio Replace what’s not working (Facebook Messenger) with what’s working (WhatsApp) o Facebook’s internal slogan is "move fast and break things," but WhatsApp has done the polar opposite. While competitors, Facebook Messenger included, added features, removed them, came alive, and went under, WhatsApp held fast to its belief in one goal: to replace texting. o the opportunity to replace texting is still enormous — SMS is still a $100 billion a year industry globally — and WhatsApp is the company in the best position to seize that opportunity. "WhatsApp is the only app we’ve ever seen with higher engagement than Fa cebook itself, o WhatsApp's growth and usage is absolutely mind-boggling o WhatsApp also does a lot more than "text-messaging." It allows users to send photos, videos, and voicemails to each other. In short, it allows users to do a lot of what Facebook does. WhatsApp has both offensive and defensive value to Facebook. o prevent "the next Facebook" from eating Facebook's lunch. WhatsApp already has a powerful revenue model, and other successful messaging apps are showing the potential for it to add many more. o Given its low cost, it might be wildly profitable in the future Facebook wants to expand to emerging markets and Europe o Whatsapp is huge in these countries What is in WhatsApp’s 2013 year-end financial statements that would have been appealing to a prospective acquirer? (1 pt)
Revenue growth from 3.8 million to 10.2 million The rest of the financial statement is not pretty, with a net income of -55 million in 2012 to 138 million in 2013. o However, given WhatsApp is a young company still in search of its business model, it holds great potential. Many appealing attributes of Whatsapp are not shown in the financial statements What is not in WhatsApp’s 2013-year end financials that would have been appealing to a prospective acquirer? (1 pt)
WhatsApp's growth and usage is absolutely mind-boggling. Five years after its founding, the company has 450 million active monthly users, of which a staggering ~315 million use it every day. WhatsApp is adding 1 million new users a day — 1 million! Facebook thinks WhatsApp could have 1 billion users in a few years, and this estimate seems conservative. (Facebook itself only has 1.2 billion users.) WhatsApp also does a lot more than "text-messaging." It allows users to send photos, videos, and voicemails to each other. In short, it allows users to do a lot of what Facebook does. So, again, Facebook really does appear to be buying "the next Facebook."
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Q4a.
Q4b.
Q5.
Suggest two serious methods that Facebook may have used to arrive at a purchase price of $19BN for WhatsApp? (2 pts) Previous comparable transactions Price a competitor may offer Projections of future cash flow and synergies Do either of the two serious methods in your answer to Q4a require in-depth use or analysis of financial statements? (1 pt) Comps - no Projections -- yes Given the information in Exhibit 3, what undated summary journal entry was likely made on Facebook’s books to record the WhatsApp deal at its closing? Use APIC account as the plug account. What does your journal entry suggest may be a huge risk to Facebook’s future financial statements, and why? (2 pts) DR Assets $1.9 billion DR Goodwill $15.3 billion o CR Cash $4 billion o CR Stock $12 billion o CR APIC $1.2 billion Goodwill accounts for a big chunk of the investment in subsidiary. Estimation of such intangible asset is imprecise and worrisome. Answers DR Goodwill 15342 DR FL intang 2783 CR Liab 33 CR DTL 899 CR Cash 4590 CR APIC 12603
Q6.
Going forward beyond the date of the WhatsApp acquisition, based on the information in Exhibit 3 on p.15, what directional effects (i.e., positive, negative, zero) did each of the five types of assets Facebook recognized on its B/S as a result of its purchase of WhatsApp have on Facebook’s 2014 I/S? Do investors care about these I/S effects? (2 pts) Acquired users - positive Acquired technology - positive Acquired patents - positive Trade names - zero Other – zero
Negative drag on FB I/S from amotized FLIAs Negative – Goodwill
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Q7.
Using end-of-year formulae, calculate Facebook’s DuPont ROE decomposition for 2014, 2013 and 2012. To what degree were Facebook’s ROE and component ratios for 2014 affected by its acquisition of WhatsApp? [For simplicity, assume that the effects of the WhatsApp acquisition on Facebook’s 2014 Net Sales and Net Income were zero.] (3 pts)
5
Q8.
How did investors react to the announcement of the WhatsApp acquisition? [You will need to go outside the case to a website or data source that will allow you to calculate daily returns around the announcement of the WhatsApp acquisition. 1] (2 pts) Facebook’s shares fell as much as 3.4% in early trading after the announcement of its purchase of the fast-growing and popular but thus far unprofitable WhatsApp. The news reduced Facebook’s market cap by billions. But by the end of the trading day, the shares had bounced back, erasing the earlier losses.
1
For example, you could go to Yahoo! Finance and use the Historical Data tab for Facebook, specify a (reasonable pre-though-post-announcement) date range such as 1/30/2014 to 3/21/2014 in the Time Period area, hit Apply, then hit Download Data and calculate returns from the Excel file that you will get.
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