Many tech companies are sitting on a ton of cash these days, but not Facebook Inc. (Nasdaq: FB). Its $19 billion acquisition of WhatsApp proves FB wants to put its cash to work.
Apple Inc. (Nasdaq: AAPL) has $141 billion in net cash on hand. Google Inc. (Nasdaq: GOOG) has a little more than $58 billion. There are hundreds of billions of dollars sitting offshore among tech and media companies. Investors have called for firms to buy back stock, hike dividends, or consider using that cash to grow through acquisitions.
But buy-side activity in the tech sector has been relatively tame in recent months.
Before buying WhatsApp, Facebook attempted to purchase SnapChat at the end of 2013 for $3 billion in cash. After they were turned down, the company began diligence on other potential acquisitions.
With the $19 billion acquisition of social-messaging application WhatsApp, the company made a bold move outbidding Google's $10 billion offer.
But Facebook did more than just pull the rug out from under its rival's growth strategy.
It cemented itself as the global leader in mobile media by using a very unique acquisition strategy.
For Facebook (Nasdaq: FB) Time Equals Money
Forget what you're reading in the headlines.
Sure, Facebook paid a meager $42 per WhatsApp user. This is in stark contrast to the average user-to-market cap cost of Twitter ($150), Facebook ($140), and LinkedIn ($120). But this number doesn't matter. It's little more than a PR talking point for people who know little about the real metrics of the marketing and media world.
Average-user cost doesn't tell us anything about long-term profitability. A free phone application with 450 million users that bumps to $0.99 per year isn't the sign that Facebook paid good money for "guaranteed consumers."
We need to dig deeper.
There are two reasons this acquisition works.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.