...in exchange for an aggregate of 183,865,778 shares of Parent's Class A common stock (valued at $12 billion based on the average closing price of the six trading days preceding February 18, 2014 of $65.2650 per share ("Specified Price")) and $4 billion in cash… In addition, upon Closing, Parent will grant 45,966,444 restricted stock units to WhatsApp employees (valued at $3 billion based on the Specified Price).
That paragraph fragment above is from the Material Definitive Agreement under which Facebook (NASDAQ:FB) is purchasing WhatsApp, a company that provides "a cross-platform mobile messaging app which allows you to exchange messages without having to pay for SMS." The company's service is free for the first year and costs just $1/year afterwards, although apparently not many of its 450 million users are paying that, since the revenue estimates I've seen are in the range of $20 million/year. The deal does not include any patents for the simple reason that WhatsApp doesn't seem to have any. What it has, in abundance, is the favorite metric of late 90s internet analysts - eyeballs. I guess it shouldn't be surprising then that none other than Henry Blodget of Business Insider declared the deal a "bold move" that he thinks will end up looking "brilliant". Blodget got himself banned from the securities industry for hyping internet stocks, so I guess not much has changed in the last 15 years.
Now maybe this is a great deal for Facebook. I'm just an old fogey and don't use WhatsApp, so I'm probably missing something. The people I know who do use the service love it, and nearly a half billion users acquired in 5 years and adding another million a day does sound impressive. But $19 billion? For a company with 55 employees and $20 million in revenue? For a company with no patent protection? For a company whose major advantage - avoiding SMS charges - is already being eroded by the major carriers offering free, unlimited texting plans? For a company that already has multiple competitors in an industry with few barriers to entry? I hope, for Facebook shareholders' sake, that I'm missing something big. Really big.
More interesting than the details of the deal itself is what it says about the state of the markets. Social media and some other tech stocks may not be in a bubble, but with a market cap of about $175 billion, Facebook is now valued more dearly than Disney (NYSE:DIS). Or McDonald's (NYSE:MCD). Or Amazon (NASDAQ:AMZN). Or Coca Cola (NYSE:KO). Or Visa (NYSE:V). Or Hewlett Packard (NYSE:HPQ) and Starbucks (NASDAQ:SBUX) combined. Or Nike (NYSE:NKE) and American Express (NYSE:AXP) combined. Draw your own conclusions and call it what you want.
And when you have a stock that is valued so highly by the market, it probably makes sense to exchange it for something - apparently anything - before the market takes back what it has so generously conferred. QE may not have devalued the dollar, but if it takes $19 billion worth of Facebook shares to buy $20 million in revenue and a lot of hope/hype, then it has surely devalued something. Quite possibly common sense.
I'm sure it isn't noteworthy that Technology M&A deals over the last month and a half are up almost 40% over last year on fewer deals at higher prices, and the most in 14 years - which aligns nicely with the top of the dot com bubble. I'm sure the crazy real estate prices in the Bay area and Silicon Valley mean nothing more than a lot of people want to live on a fault line. Sure, it doesn't mean a thing that companies with revenue-free business models - Snapchat and Pinterest, I'm looking at you - are routinely afforded valuations in the billions of dollars.
Indeed, Snapchat reportedly turned down Facebook's offer of $3 billion. I guess Zuckerberg figured he'd make an offer WhatsApp couldn't refuse. And despite telling the WSJ just a few months ago that he had no interest in selling, WhatsApp founder Jan Koum couldn't and didn't refuse the Godfather of Social Media. About the only thing we can say for sure about this deal right now is that Koum's mother didn't raise a fool.
Maybe all this bubble-like behavior doesn't mean a thing. After all, the Fed tells us that a bubble can only be identified and dealt with after the fact. And who am I to argue with the market or Mark Zuckerberg? I didn't invent the biggest waste of time in the history of the world. I didn't single-handedly reduce the productivity of an entire nation. Heck, I didn't even drop out of Harvard - something that would have been quite impossible in my case.
I don't like the term bubble anyway; I prefer monetarily-induced mass hysteria, but that's probably just a nitpick. In any case, markets are efficient - someone won a Nobel Prize for that insight just last year, so you know it's true - and if it says WhatsApp is worth $19 billion, well that's exactly what it is worth - today, anyway. Efficient market theory has little - actually nothing - to say about the value of anything tomorrow, when new information might become available and incorporated into Facebook's stock price. That being the case, I'd urge Mr. Koum and the other newly-minted 54 millionaires at WhatsApp to read up on how Mark Cuban hedged his Yahoo (NASDAQ:YHOO) stock after he sold them Broadcast.com. Or better yet, call me. I've done a few collar trades in my career, and Cuban is busy trying to figure out how to beat the Heat.
I have no idea whether this deal will work out for Facebook in the long run. Maybe I just don't get it and social media companies trading at 3-digit multiples makes perfect sense. Maybe it won't turn out like Microsoft's (NASDAQ:MSFT) purchase of Hotmail at the same price per user. Maybe it won't turn out like the AOL/Time Warner deal. Maybe WhatsApp - and Facebook for that matter - isn't the new MySpace. At a minimum though, the deal should at least make you wonder if there isn't something rotten going on at the core of our economy.
If this is indeed a bubble, why in the world are we in our third one in 15 years? Bubbles were once rare phenomena, once-in-a-generation occurrences. Bubbles do not happen in a vacuum - or at least I don't think so; there are plenty who will say differently - so this is a result of our chosen economic policies. There may be multiple explanations, but I'd suggest that a good starting point for an investigation would be the Marriner Eccles Building, where our monetary masters are busy pulling the levers of monetary policy (please ignore that woman behind the curtain).
QE and all the other policies of easy money are not cost-free, as we discovered in 2008. We have argued that the main effect of QE is psychological, and certainly it has been effective in revving up what Keynes called animal spirits. Or in this case, maybe the animal spirits of bubbles past. Will this deal mark the top? I have no idea, but I can't seem to shake the feeling that I've seen this movie before and know how it ends. Just call it a little dose of dot com deja vu.
Disclosure: No positions