Saturday 8 March 2014

Reviewing M&A Lectures


Today’s lesson in Merger and Acquisition, the lecturer raised a question relating Face Book purchase of Whatsapp.  He particularly wants us to think why this M&A take place and who is benefiting. Majority of students were not able to answer the question. I was one of them. This stirs me even after the lesson. My thoughts are lingering why Face Book purchase Whatsapp and how it is going to be beneficial.

According to Reuter 20th Feb,Face Book agreed to purchase Whatsapp at $19 billion which was $4 billion in cash and £12 billion in Face Book Share plus extra $3 billion for the whatsapp employee. Many critics noted that the deal was more expensive comparing to the price Google offered to buy the youtube in 2006. On top of this, Whatsapp is allowed for its independence existence.  Therefore, many potential investors and analyst are talking about the profitability and success of the Merger. 

 Being a line of business is similar and Whatsapp is a start up company, it would naturally be taken over by Face Book. This is what I thought but Face Book management might have different views, therefore, they had allowed independent existence.

In the corporate world, a merger is combining two organizations to become one; sometimes on equal term and sometimes it does not. Acquisition is a takeover of an organisation, in that case, the board of directors including the management of the team may lose the jobs and there is a possible reorganisation. Having allowed for independent existence means the companies agree to merge rather than acquisition. Most mergers/takeovers have a certain degree of risk attached to it. However, with the proper planning and well understanding of the business requirement, they can be successful. For example, Disney and Pixar

Furthermore, every Merger and Acquisition always has a motive behind the decision either to acquire or not to acquire. Depending on the business needs, the company who wishes to purchase must think ahead the strategic plan. Usually many M&A has three motives mainly on strategic motives, financial motives and managerial motives.




Out of three motives, managerial motive is the least possible as both companies are working on the basis of social networking and the pricewise, Face Book is a free service and Whatsapp is $0.99 pence for a whole year.  Face Book is having its revenue from the website traffic and advertisements but Whatsapp is boasting about being able to keep away the advertisement for their users. I wonder how Face Book could benefit financially from a start up company like Whatsapp. So, I assume there must be strategic motives behind the decision. What are they? Are they benefiting to shareholders?

Shareholders are always expected to maximise its wealth. But the present situation of high price offer and issuing more shares makes the Face Book share falls to 5%. On top of this, diluting shares means less dividend to the shareholders. However, a part of the process of Merger and Acquisition is to have the prior agreement with the shareholders. Thus means without the proper strategy, no major shareholders will agree to accept the process. 

The chart below may be one of the reasons Facebook choose to merge with Whatsapp. The data from the chart suggests Face Book is being threatened by the Whatsapp globally except US. So it is apparent that this merger was focused  to improve and develop the Face Book future to lead the global market..


From this, it could be summing up that the merger agreement is most benefiting to Face Book and contributing its future. Shareholders may suffer at this moment but for the longer term, if the management of Face Book strategically well plan, then there will be a possible profit in the future.

I am eager to know whether it is a successful merger or not. But in the mean time, it is a time to watch.


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