WHATSAPP’S ACQUISITION BY FACEBOOK:

A CALCULATED RISK OR LOST OPPORTUNITY? ANALYSIS OF THE DEAL BETWEEN WHATSAPP AND

FACEBOOK

BY:ADITYA PATTNAIKWBNUJS, KOLKATA

INTRODUCTORY

• Modern markets are characterized by mergers and acquisitions.• Number of benefits – improves efficiency, increases value

for the shareholders, access to newer markets etc. • Rapid growth in communication sector and social media

industry. • Acquisition of Whatsapp by Facebook (2014) – estimated

worth of 19 billion USD.

POINTS FOR DISCUSSION

• Origin and Evolution of the Entities – Whatsapp and Facebook• Structure of the transaction• Applicable regulations and clearances• Objectives and synergies• Finding and Analysis – Positives and Negatives

FACEBOOK – THE ACQUIRER COMPANY

• Facebook originated in Harvard University as Facesmash, developed by Mark Zuckerberg and his three other friends. Later on it spread to Yale and other universities in the United States. • Attracted angel investments from PayPal and Walmart Stores. • Currently the biggest player in the social media market around the globe

with 1.8 billion subscribers around the world. • Incorporated in the United States at Menlo Park, California. Listed on the

New York Stock Exchange and NASDAQ. Incorporated in the year 2005. • Follows an advertisement structure for revenue.

TIMELINE OF EVOLUTION OF FACEBOOK

MILESTONE / EVENT DATE AND YEAR

Origin of Facebook as Facesmash in Harvard

February 2004

Launch of facebook.com globally August 2005

Facebook reached 30 million subscribers July 2007

Facebook adopts advertisement model and earns profit

2009

Facebook goes public – offers IPO 18 May, 2012

MAJOR ACQUISITIONS AND TAKEOVERS BY FACEBOOK

TARGET ENTITY DATE AND YEAR CONSIDERATION

Friendfeed – social media news aggregator

August 2009 15 million USD

Divvyshot – photo sharing startup

March, 2010 unavailable

Instagram – photo shating tech startup

April, 2012 1 billion USD

Whatsapp – Mobile Messaging Platform

February, 2014 19 billion USD

FACEBOOK SHAREHOLDING – BEFORE AND AFTER IPO

Facebook Staff35%

Mark Zuckerberg28%Dustin

Muskovitz7%

Sean Parker

5%

Eduardo Saverin

6%

Digital Sky Tech12%

Goldman Sachs5% Peter Thiel

3%

Before IPO

Facebook Staff Mark ZuckerbergDustin Muskovitz Sean ParkerEduardo Saverin Digital Sky Tech

Public Share-holding

20%

Zucker-berg and

others28%

Facebook Employ-

ees32%

Venture Capital20%

After IPO

Public ShareholdingZuckerberg and others

STRUCTURE OF SHAREHOLDIND AFTER IPO• Adopted a dual class stock structure while going public. • Divided into Class A and Class B • Equal equity in both Class A and Class B shares• Difference in Voting rights – Class A carried one vote, Class B carried

10 votes.• Class A retained with Zuckerberg and other investors, Class B issued

to the public. • Zuckerberg retained control in decision and management, capital

raised from the public.

WHATSAPP INC. – THE TARGET COMPANY• Whatsapp - freeware, cross-platform and end-to-end encrypted instant

messaging application.• Founded by Jan Koum and Brian Acton and incorporated in 2009. • Headquartered at Mountain View, California. • Initial funding raised from Sequoia Capital, doesn’t follow the advertising

model. • Apart from Europe and USA, the primary markets are India and Latin America. • Has managed to remain advertisement free even after the acquisition. • Generated money through annual subscription, stopped that too later. • Active monthly users – 1.2 billion , by the fourth quarter of 2016

GROWTH OF WHATSAPP

SHAREHOLDING PATTERN OF WHATSAPP

Jan Koum45%

Brian Acton15%

Employees of Whatsapp20%

Venture Capital20%

Broad Shareholding

Jan Koum

Brian Acton

Employees of Whatsapp

Venture Capi-tal

STRUCTURE OF THE TRANSACTION• Mixed acquisition – consideration partly paid in cash, partly in stocks. • Whatsapp would run independently even after the acquisition. • Breakdown of consideration

183,865,778 shares (worth USD 9 billion) and USD 4 billion in cash to the shareholders

Class A shares worth value USD 12 billion. Restricted shares worth USD 3 billion, which would convert into shares after

6 months. (Whatsapp would hold 7.9% of Facebook’s shares) Jan Koum placed in the BOD of Facebook, with a salary of USD 1 billion, in

form of restricted unit shares. (Vesting over 4 years)

Publ ic shareholding (Class A)

20%

Mark's shareholding (Class A+B)

28%

Facebook's employees (restricted stock, Class

A+B)32%

Venture Capitalists/hedge

fund/other investors (Class A+B)

12%

Whatsapp founder and employees

8%

Broad Shareholding structure of Facebook post deal

Public shareholding (Class A)

Mark's shareholding (Class A+B)

Facebook's employees (restricted stock, Class A+B)

Venture Capitalists/hedge fund/other investors (ClassA+B)

APPLICABLE REGULATIONS

• Both the companies incorporated in US – No Foreign Exchange Regulations.• Transaction happening through Private agreement. • Obligations to make an open offer would be applicable if the Target

Company is listed – Whatsapp was not listed, no intervention of SEC. • Facebook is listed on NASDAQ – under the ambit of SEC regulations.

Requirement of shareholders meeting, issue of proxy, complying with required filings.

ANTI TRUST HURDLES IN US & EU

• The deal faced a number of anti trust and piracy concerns in US and European Union, for the reason that the entities of market leaders. • Sherman Anti-Trust Act, 1890 and Clayton Anti-Trust Act, 1914.• Section 7 prohibits acquisition which would affect competition substantially. • Amendment to the Clayton Act through Hart-Scott-Radino Antitrust

improvements Act, 1976 – requirement of pre merger notification and approval form the FTC. • FTC cleared the approval on April 10, 2014, but issued a privacy warning to

Whatsapp not to sell personal identifiable information.

ANTI TRUST HURDLES IN EU AND OTHERS

• Needed approval from the European Commission under the European Commission Merger Regulations and Implementation Regulation. • All deals which would affect the market competition in the

European Union. • EC allowed approval as two were not close competitors and

had business in different markets from each other.• Did not address privacy issues as it was outside their ambit.

FINDINGS AND ANALYSIS

• Objectives – to reduce competition with Whatsapp’s messenger and stop division of user time between Facebook and Whatsapp, • Whatsapp has been growing at a tremendous rate. • It would help realise the dream of “internet.org” which would provide a bundle of basic

internet services. • General trend of Facebook to acquire tech startups and allow them to function

independently. • Gave access to Facebook to newer markets such as Latin Americas. • Synergies – Economies of scale on operational front, cross selling in newer markets, on

revenue front. Option to monetize Whatsapp through advertisement model.

MARKET ANALYSIS OF FACEBOOK AND WHATSAPP

CONCLUSION

• One of the biggest deals in the telecom sector in the recent years. Both positive and negative views. • Facebook criticized for acquiring an entity which cannot be monetized, at such

high price. No substantial benefit for Facebook. • Whatsapp criticized for concerns of data privacy and incorporation of

advertisement model after the deal (although Whatsapp has not incorporated it yet)• The predicted synergies are in the process of getting realised for which it is

too early to comment on the success or failure of the deal.