Facebook’s recent acquisition of WhatsApp for $19 billion represented the largest-ever acquisition of an Internet messaging service company in history.
WhatsApp allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks. This can save people who travel, or live in emerging markets, hundreds of dollars a year. As a result, WhatsApp is adding about one million new users per day.
At the time of the acquisition in February 2014, WhatsApp had some 450 million users and, after the first year, charges users a subscription of $1 per year. Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue. Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?
It is possible that Facebook sees the opportunity to sell more Facebook ads because of the information they gather from WhatsApp users. Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion. Presumably Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp.
Therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic purchaser can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic buyer is calculating the economic benefit of combining your business with theirs.
There can be many "strategic" reasons why a larger company might want to buy yours. Here are 5 to consider:
1. To control their supply chain (i.e. you are a key supplier)
In 2011, Starbucks announced it had acquired Evolution Fresh, one of their providers of juice drinks, for $30 million. This allowed Starbucks to be less dependent on one of its suppliers.
2. To enhance sales (i.e. you provide an opportunity for the purchaser to increase its sales)
In 2011, AOL announced the acquisition of The Huffington Post for $315 million, even though HuffPo had just turned its first modest profit on paper. AOL wanted to give its advertising sales people more inventory to sell and HuffPo had 26 million unique visitors a month.
3. To make their products look sexier (i.e. your product enhances the purchaser’s products)
In 2011, Microsoft bought Skype for $8.5 billion even though Skype was losing money. It is possible that Microsoft expected to sell more Windows, Office and Xbox products by integrating Skype into everything they already sell.
4. To enter a new geographic market (i.e. you offer an expansion port for the purchaser)
In 2012, Herman Miller paid $50 million to acquire POSH Office Systems (a Hong Kong based designer, manufacture and distributor of office furniture) in order to get a foothold into the world’s fastest growing market for office furniture.
5. To get a hold of your employees (i.e. your employees are valuable to the purchaser)
Facebook reportedly acquired Internet start-up Hot Potato for $10 million, largely to get hold of the talented developers working at the company.
Most acquisitions are done for rational reasons where an acquirer agrees to pay today for the rights to your future stream of cash. You may, however, be able to get a significant premium for your company if you can figure out how much it is worth in a specific purchaser’s hands.
Curious to see what your business is worth and how you might improve its value to both strategic and financial acquirers? Contact us at jason@vspltd.ca or www.vspltd.ca. You can also complete the Sellability Score questionnaire and we’ll send you a custom report complete with your score on the eight key drivers of Sellability. Take the test now: http://www.sellabilityscore.com/vsp/jason-Kwiatkowski.
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