Friday, February 21, 2014

Facebook and WhatsApp: The Worst Deal Since Countrywide

By Thomas H. Kee Jr.
Facebook Inc.’s acquisition of WhatsApp earlier this week looked to me like the worst deal I have seen since Bank of America bought Countrywide Financial.

When Bank of America announced they would buy Countrywide (at the beginning of the credit crisis) I cringed, and was absolutely spot on. I expect my points here about the purchase of WhatsApp by Facebook  to be spot on as well.

First, I do not expect this Facebook transaction to have long-lasting negative influences on earnings, I do not expect legal ramifications, and therefore I do not place it in the same category, but it is still looks to me like a very bad deal. Clearly, CEO Mark Zuckerberg likes the idea of gaining eyeballs, I think most social media companies do, but paying over $30 a user is too high.

I do respect and appreciate the business WhatsApp has created, and their growth has been excellent, and their CEO can apparently close a deal (over dinner), but that business can be easily mimicked, even carriers like Verizon could integrate similar features, and so could phone manufacturers.

Also, this is a fad, and younger users, who flock to the next big thing, will do the same thing after this technology has been worn out. The half-life for this is about 1-2 years, hardly long enough for Facebook to recoup its investment. Shareholders will need to write off about $17 billion of the $19 billion purchase price because, even at rich valuation levels, WhatsApp is worth only about $5 a user.

Read the rest here.

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