Facebook's $19 billion acquisition of WhatsApp

Mergers and Acquisition

Mergers And Acquistion

Mergers and acquisition are aspects that managers of various companies use in order to grow rapidly or increase their market share in a given industry. It is often characterized by dividing, buying, selling, and combining similar entities and different companies that can exist as joint enterprises. The main aim of mergers and acquisitions is to restructure organizations with the purpose of providing positive value and growth (DePamphilis, 2012). This study endeavors to examine the circumstances that resulted in the acquisition of WhatsApp by Facebook. Facebook is a publicly traded company whose shares began trading in the NYSE since last year. Various advantages and disadvantages often accompany the process of merging and acquisition as seen from this example. This report will also identify the organizational structure that has resulted from the acquisition and the possible changes in the companies' human resource practices.

Mergers are differentiated from acquisition partly from the size of the company and financing. Payment by cash is usually termed as acquisitions because the target comes under the indirect control of the bidder's shareholders while the shareholders of the target company. Stock payment is mainly used in mergers. The company's stocks are given in a ratio that is directly proportion to the value of the latter. There are advantages that arise from mergers and acquisitions. These include improved EPS and profitability, higher competitiveness, increased market share, lower costs of production and operation, increased industry positioning and know how. There are also challenges that are associated with mergers and acquisitions of companies. These challenges include intangible costs, potential devaluation of equity, legal expenses and high costs of the acquisition (Ray, 2011).

Circumstances

Competition in the social media industry is growing on a daily basis. Leading participants in the industry like Facebook, Twitter, and Google+ have been adopting various strategies aimed at fostering their sustainability and profitability. Facebook founder, Zuckerberg observed WhatsApp growth in the recent past and was pleased with its prospects. It is shown that talks about the acquisition as early as last year, but the deal was closed in mid-February. Facebook acquired WhatsApp, a company with an estimate of $300M revenues and 55 workers, for $19 billion (Ember, 2014). In today's global market, successful organizations sell for much lower valuations. A termination fee is attached to the deal costing Facebook $1 billion in shares and $1 billion in cash. Facebook has declared that WhatsApp will retain its brand and continue operating independently. However, Facebook's organizational structure will change because WhatsApp's CEO and co-founder Jan Koum will be on the Facebook board. The contract is subject to regulatory approvals. In a conference, Mark Zuckerberg referred WhatsApp as an extremely high-quality product with rapid growth and incredibly strong engagement (MacMillan & Rusli, 2014).

One advantage is that it will increase the company's market share. Facebook noted that the percentage of WhatsApp's SMS system was significant globally. It also noted that WhatsApp is adding one million users a day. In the future, it might reach one billion people. Jan Koum stated that WhatsApp rapid growth and high user engagements are driven by instantaneous, simple, and powerful messaging capabilities (Ember, 2014).

Reasons

The main reason for Facebook to purchase WhatsApp is to avoid irrelevancy in the industry. Irrelevancy can happen very fast, especially in digital technology. Facebook is invulnerable to changing markets. Changing communication requirements have altered the impact and use of things like texts and photos. These factors have the potential impact of eroding the value of Facebook in the future. Facebook acquired WhatsApp to leverage its trend in social media. Facebook technologists and managers have developed platform apps for messaging and photos. They have also worked to make to increase the platform's mobility. WhatsApp had developed a superior answer for messaging. By merging with WhatsApp, it assures Facebook that is will be a relevant player in the industry in the next ten years (Ember, 2014).

The main disadvantage associated with the merging of WhatsApp and Facebook is that there are high costs of the acquisition. Facebook acquired WhatsApp, a company with an estimated revenue of $300M and 55 employees for $19 billion. This very large amount has continued to elicit mixed reactions for the last few days. The second disadvantage is related to the several legal expenses that must be paid to finalize the venture (MacMillan & Rusli, 2014).

Lessons

Two main important lessons are learnt from Facebook's acquisition of WhatsApp. First, giving acquisition some independence is important. Earlier on, Facebook did not know how to monetize its leadership, but has succeeded in the last years. Zuckerberg's team permits the leadership of WhatsApp and Instagram to be independent, grow their user base, learn to monetize with a large organization, and operate on their white spaces. The second lesson is that one should create and use his own currency. Undoubtedly, $19B is a very large amount of money. Facebook can 'print' its currency. This private money is used for acquisitions and mergers. As long as the company has high market valuation, it can make acquisitions using shares rather than real money.

The third lesson learnt from the acquisition is that all organizations risk becoming irrelevant at some point. Innovation, customer behavior patterns, technologies, and inventions continually challenge old success formulas. Many leaders fall into a pattern of trying to extend and defend their companies in the face of market shifts, speeding up the fall into irrelevancy. Leaders also try to obtain new business and integrate into the old business. This strips away the new business leads and value resulting in business irrelevancy.

Conclusion

In conclusion, we learn several lessons from Face book's leadership. First, companies should learn to recognize the market shift and accept it or any other opportunity that crops up. Secondly, companies should bring the market shifts into the companies and leave them independent. Third lesson is that companies should convince investors that they could remain relevant in the industry (DePamphilis, 2012). We also see that several advantages may arise in the merging of WhatsApp and Facebook. These advantages include improved profitability, increased market share, financial advantage, higher competitiveness, industrial positioning, knowhow, and lower costs of production and operation. The disadvantages include the high take over costs and legal expenses.