January 8, 2019

girl-facebookI always start my analysis with a simple disclaimer that no matter how many Ivy League degrees one has, none can predict the future. With my near perfect GMAT score in quants, when it comes to analytical capabilities, I am confident that I am close to the top level. Yet it is necessary to note down this simple caveat at the beginning.

Because no one can predict the future, every acquisition is essentially a leap of faith – just like every marriage is. And, the parallel does not end there – similar to a marriage, probability of success of an acquisition is also rated just below 50%. Thankfully, that scary statistic does not stop people from marrying out of love, and companies from acquiring other companies out of – whatever leads them to get the urge to merge.

The cheer squad is out justifying the deal – rolling out measures such as MAU (monthly active user), revenue per MAU, valuation per MAU and such numbers. It reminds me of the go-go days of the last internet boom where valuations per eyeball led companies such as Webvan, pets.com and others to use similar statistics as the justification of their valuations and shaky business models. As an example, here is one list of top ten dot com flops. Here is another one compiled by CNN. Curiously, both of them missed Myspace.com, the Facebook of 2005, acquired by News Corporation for an astronomical sum of $580 Million.

Here is a snippet from Andrew Beattie:

In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.

Why do I quote these numbers and examples? Only to remind you how short memory can be despite figures and statistics being set in stone. I will not go on and on with digging the graves because I have a couple of very important points to make.

First is this – what are other comparable businesses to WhatsApp? You could say none – but that is not true. Essentially, both Viber and Skype do similar things and have a wide reach. I have been using Skype since 2000 and Viber for at least 3 years before I started using WhatsApp. In addition, there are many other apps, including iMessage that allow online messaging. So what is the source of magic in this deal?

Let’s first compare the number of users, because they are the sole reason for astronomical valuation. Skype has reported more than 300 legitimate users. Many of them pay substantial sums for the privilege of using its services. For example I pay between $50 and $200 every year for its service. Yet Skype was sold to Microsoft for $8.5 Billion in 2011.

Yes, there are nearly 450 Million users of WhatsApp – but what do WhatsApp users pay? Zero, nada, zip – most of them pay the company nothing. In fact that is its biggest attraction! And, also the reason why it is so popular in Africa and parts of Asia. How much revenue can derive from serving ads to populace with limited buying power?

Now this is where the story gets very interesting. Indeed, as pointed out by Prahlad in his book “The Fortune at the Bottom of the Pyramid“, there is indeed a fortune to be made there. WhatsApp’s business model was finely tuned by its careful founders. And they have made a fortune by selling to Facebook at the right time, at a very fortunate price.

The key question is will Facebook be able to make a fortune out of its purchase? The demographics of Facebook users and WhatsApp users are significantly different. As I said in one of my recent posts on QuoraI think social media will start differentiating itself further. Facebook is fast becoming a housewives’ platform while LinkedIn is fast becoming a recruiters’ platform and Twitter is becoming a journalists’/politicians’ platform. I know this is still a gross generalisation, but consider this – many Facebook groups (such as HARO) have now started their own social platforms that are growing very successfully. This phenomenon is only going to accelerate as the technology evolves. Generic social platforming technologies as not yet commercially available easily. But they will be. Similar to what happened with message board technologies, blog technologies and countless other similar plug-ins. Once that happens – potentially every LinkedIn group, Facebook group, Yahoo group and Google+ group could evolve into an independent social platform with its own sub-culture and rules.”

For this reason I think the current deal is yet another case of Easy come, Easy go. In this article, the authors (Andrew McAfee, associate director of the Center for Digital Business at the M.I.T. Sloan School of Management, and Erik Brynjolfsson, professor at the M.I.T. Sloan School of Management, director of the Center for Digital Business) note that WhatsApp is a company of 55 employees and $19 Billion valuation, asking “Are we building a jobless economy?”

My view is different. I think in this case, we are barely building any economy at all. As noted in my Quora post above – when the dust on social media segregation settles, and the users self-select to fall in the right camp for the right activity the valuations will settle down closer to the norm. At the moment, driven by relentless quantitative easing, and lack of real investment opportunities, anything that looks remotely promising is being valued way higher than it should be. In this dot-com bubble on steroids, looking for logic in investment valuations is akin to hang gliding in the eye of a storm – you may think you are safe, but that is just a temporary illusion.

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Our Quick Notes On Five Flows Of Supply Chain Management

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High Demand for Real Supply Chain Experts
Nokia Sheds Iconic Phone Unit in an Attempt to Re-bundle Itself
Asian Banker Summit 2015 – Connecting Finance with Supply Chains
  • Didn’t understand the title while I read inside the story, It explains how any innovation become the big player.

  • Social Media Use in 2018
    If we talk about social media use in 2018. A majority of Americans use Facebook and YouTube, but young adults are especially heavy users of Snapchat and Instagram

    Facebook and YouTube dominate this landscape, as notable majorities of U.S. adults use each of these sites. At the same time, younger Americans (especially those ages 18 to 24) stand out for embracing a variety of platforms and using them frequently. Some 78% of 18- to 24-year-olds use Snapchat, and a sizeable majority of these users (71%) visit the platform multiple times per day. Similarly, 71% of Americans in this age group now use Instagram and close to half (45%) are Twitter users.

    Different social media platforms show varied growth
    Facebook remains the most widely used social media platform by a relatively healthy margin: some 68% of U.S. adults are now Facebook users. Other than the video-sharing platform YouTube, none of the other sites or apps measured in this survey are used by more than 40% of Americans….. (https://pewrsr.ch/2FDfiFd)

  • Such a good article Vivek. Facebook’s astonishing $19 billion splurges on WhatsApp is the biggest acquisition of a venture-capital-backed company ever, and the largest internet deal since Time Warner merged with AOL in 2001. Facebook has already identified mobile as a central driver of its growth going forward. The WhatsApp deal is a logical way to try to turbocharge that.

  • Zuckerberg clearly had his eyes on the billions based user base potential of WhatsApp. Facebook currently has an estimated user base of 1.2 billion and is facing a growth slowdown. The company suffers from the fear of losing its user base drastically to its competitors in the coming years. Zuckerberg had therefore been on the lookout for an acquisition that can help him overcome this.

  • The technology world saw many strategic acquisitions and mergers during the last year that completely changed the way they performed. These deals changed things for both the acquirer and the acquired. These financial transactions had an impact on the stock market as well, giving good news to the shareholders and giving them hopes for better years and consequently a bright future.

  • Since Zuckerberg plans to let WhatsApp operate independently as it is, this synergy could thus work to Facebook’s advantage as it seeks out its next billion users and also seeks to enhance its penetration in other parts of the world, especially the largely populated India and China. WhatsApp is the only widely used app that has more engagement than Facebook and it also has a strong presence in India and China.

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