GlobalGyan Blog

It's one of the biggest technology deals of recent times and there's some worry if we are seeing a repeat of the late 90s dot-com bust. (Remember, many of the 20-something old entrepreneurs were at school then and probably don't have any recollections of that euphoria and bust.)

First, about the valuation. We all know there's really no foolproof, scientific method to value many businesses, particularly in the hi-tech / nextgen space. Like art, it is often in the eye of the beholder. The best way to evaluate a valuation is to to see the most critical assumptions that one has to believe in. Let us peel it down...

Facebook has a Enterprise Value to Revenue ratio of nearly 20. In case of Google, which is obviously more mature than FB, the ratio is about 6. So, to justify the Whatsapp (WA) valuation, first of all we would need to believe that it could generate revenues of $1 - 3 Billion. Is that possible?

WA has 450mn active users and is likely to add a few hundred million new users annually. Is it reasonable to believe that it could touch 1bn users in a couple of years? Smartphone numbers are estimated to be 1.75Bn in 2014, perhaps 3bn by 2017. Can WA achieve 30% penetration? Likely. Remember, already Facebook has nearly a billion mobile users.

So, with a billion user base, WA would have to generate $1-3 per user per annum. Is that inconceivable? No, that's just about Rs 10 per month: all those forwarded jokes are worth that much, right?

Strategically, buying WA makes a lot of sense for FB. As Rene Ritchie points out, Facebook's primary business is to catch our attention (and subsequently monetize it). It was clear that people were spending a lot of time on Whatsapp; most private and small group conversations had moved there and probably FB Messenger was not having the desired impact. WA was multi-platform and easy to use (no login; no "adding"). FB cannot let people's attention wander away from any of its products; so it bought out a competitor.

Then what could go wrong?

For starters, the valuation multiples we started with could be too optimistic. Compared to other, "traditional" technology companies (Apple, IBM, Microsoft, AT&T -- their EV to Revenue ratio is 2 to 3 times), FB appears overvalued, probably Google too. So, if you took a 2X multiple, WA would have to generate $9 per user per annum, which is obviously tougher than $1-3.

The bigger issue is about the monetization strategy. Will a billion people pay a buck every year to keep Whatsapp or will they move to the next free messaging app? What caused it grow exponentially (no login, no "adding") could also be its weakness - mobile number based connections can be replicated on any other app almost as easily. Whatsapp groups will need to be recreated by the admins and profiles will need to be updated but don't underestimate the effort people are willing to put in to save a buck! As several hundred millions come up for their first payment shortly, WA will need to justify why it is better than many other multi-platform, free messaging apps (including BBM which still has many dedicated fans). And of course, the fear of advertising always lurks around the corner.

Overall, I believe it is a good, strategic move by Facebook. By paying only $4Bn (20%) in cash, and the rest through stock, FB has used its highly valued stock to make this risky move. Not only have they purchased a potential billion-dollar revenue product, they have also gained control over a major competitor that somebody else could have acquired. 

During my corporate career, mergers / acquisitions was an area of focus and interest. Even my first major initiative in the academic world was the IIMA course on Cross-border M&A and Integration. Whether it was in the practical realm or the "theoretical" world, it was clear that the concept of post-merger integration was critical to the success of an acquisition.

One of the best practices in this space is that you plan for integration almost at the same time as you start evaluating the acquisition deal. There are two major reasons: integration is tough and you need all the time you can to plan for it; but more importantly, how you intend to integrate has major implications for the value as well as structuring of the deal. Many deals which may be attractive on a stand-alone basis, fall apart when you consider all the implications of what needs to happen post-deal. Or unattractive deals become viable with the addition of integration benefits or synergies.

Just as the above concept is valid in the case of a merger, so is it if you intend to de-merge a business / entity. Splitting a part from the whole comes with a similar set of issues around people, infrastructure, laws / regulations, etc. You can articulate an intention to de-merge (or merge) but a decision should only be taken after the separation (or integration) issues are considered and resolved.

Imagine if this is the complexity in corporate M&A which might involve thousands of people, what it would take when millions are party to such restructuring actions. This theory (or gyan) is extremely relevant to the way the Andhra Pradesh / Telangana issue has been handled by the Indian government. Like many other decisions, the govt seems to have adopted the principle of Act (announce) Now; Think (analyse) Later.

(Disclaimer: I am not close enough to the situation to comment on the historical and current reasons for the proposed split. Nor do I have any direct stakes in whatever the outcome might be. I was born in Andhra Pradesh and spent a few childhood years there. I have family and friends in multiple cities in AP.)

There are several (recent) instances of new states being created for mostly economic and administrative reasons. I have read some articles on the historical promises made to people of the Telangana region which successive governments have failed to fulfil. So it is safe to say that there are compelling reasons to consider the creation of Telangana state.

But, before announcing the decision as fait accompli, the Government should have identified and listed the major "dis-integration" issues. A process of consultation with key stakeholders (MLAs, MPs, media, opinion influencers, etc.) from all regions would have led to some acceptable alternatives for all key issues. The cost - benefit of these 'solutions' would then have informed us if the original decision was still worth pursuing.

It appears that the Srikrishna Committee did some parts of what has just been suggested. Unfortunately, the govt seems to have either completely ignored the output of that work or failed to publicly share what its resultant dis-integration plan was. The recent setting up of a GoM without any representation from the "affected parties" re-affirms the govt's disdain towards local opinions.

In my view, the people of Seemandhra who are agitating for a united Andhra really don't care about a "united" state. What they care about is the future of their jobs / investments in Hyderabad. What they want to know is that water would be available to the downstream regions. What they want comfort is on the centre's economic support to their state. Similarly, people from Telangana should be concerned about the availability of electricity for their state. They should be eager to know the economic development plan / support for areas beyond Hyderabad. These are issues that a dis-integration plan should have covered. These are issues that can be solved with some give & take, if negotiated in an atmosphere of trust.

It is still not too late. For once, can the central govt give up its unilateral behaviour and embark on a conciliatory process of de-merger? If not the PM, maybe the putative future PM can embrace the statesmanly role that is required at this time. Else, what should have been a clean de-merger will take on the ugly tones of partition.

Two iconic brands that most of us have experienced are now getting together. Microsoft's acquisition of Nokia's mobile phone business for Euro 5.44Bn could light a spark in an industry that has become a duopoly between Apple’s iOS and Google’s Android platforms. There is no doubt that both Microsoft and Nokia have fallen behind their peers over the last 5-8 years, failing to notice and recognize tectonic shifts in their markets. This deal could put them back in the reckoning, for at least the bronze medal.

Microsoft has traditionally been a software & services company; its recent foray into devices (Surface tablets) has not been particularly impressive. Nokia was, till 2012, the worldwide leader in mobile phones and continues to make impressive devices for all market segments. The complementarity has been further established through a 2-year long strategic alliance between them. Unfortunately, the partnership did not yield much: Windows Phone has just 3.7% share of the smartphone platform market and Nokia doesn’t even feature in the top 5 global smartphone vendor list. Will an acquisition help them achieve the magic that an alliance could not?

For Microsoft, the acquisition is not so cheap; while it gets about Euro 10Bn in annualized revenues, operating margins are at zero. Even with annual operating synergies (read: head-count reduction) of Euro 450mn, Microsoft has to believe in a major turn-around of the business. In its analyst presentation, Microsoft has assumed a 15% share of the global smartphone market to demonstrate long-term value creation potential. From Nokia’s current 3% share, it is a long journey ahead. 

In 2011, new (ex-Microsoft) Nokia CEO, Stephen Elop wrote to his team about them being on “a burning platform” and sought to “take a bold and brave step into an uncertain future”. It must be conceded that at least the fire did not consume them. Its Lumia range of phones have been well received and in several markets outside the US, they are amongst the top 5. However, with even Blackberry (the other beleaguered smartphone company) putting itself on sale, Nokia probably ran out of options. Given its reliance on Microsoft’s operating system, it is likely that the Nokia board did not explore a wide range of suitors. 

For this deal to be successful, Microsoft has to take a fresh look at its mobile device and services strategy. Competing head-on with Apple, Google / Samsung and possibly Amazon would not make much sense. Microsoft-Nokia has to create new spaces for itself, whether in terms of customer segments and / or geographies. It could become a price warrior in emerging market regions where the Nokia brand still has huge salience. Alternatively (or additionally), it could focus on its stronghold, the enterprise market; acquiring Blackberry could be the next step in such a strategy.

Nokia’s transformation from a Finnish paper production plant into a global technology major was a remarkable story. Can Microsoft help Nokia rise again from its current depths? 

BlackBerry as a B2B services / apps player would be of value... Not much left in their devices play (except the familiar qwerty keyboard). 

When I think of enterprise segment, I am not looking at the end-user mobiles as they are today... there are many Business applications that are yet to get mobile-enabled... at some point, with security and data privacy concerns, CIOs could start playing a role (again) in decisions on devices, networks and applications. For instance, BlackBerry has a major play in Automobile OS (through their QNX acquisition)... that is an example of enterprise mobility. There could be similar stuff in Healthcare, Education, etc. These can be huge markets and are not necessarily (directly) tapped by Apple, Samsung or HTC -- yet.

Maybe I expect too much disruption from MS, but let me reiterate: the enterprise mobile market is not what we see today. It is not just a smartphone / device market. It is not Office or email either. Those are being addressed quite well by Android and iOS now. Somebody will disrupt the enterprise software / mobility market. It can be transformed; folks are working on it. Good chance it will not be an insider.