Friday, February 21, 2014

Facebook, Whatsapp deal articles

A couple of reads on the deal that I thought were interesting.

This week, I was at the Tuck School of Business at Dartmouth, talking about the difference between price and value. I built the presentation around two points that I have made in my posts before. The first is that there are two different processes at work in markets. There is the pricing process, where the price of an asset (stock, bond or real estate) is set by demand and supply, with all the factors (rational, irrational or just behavioral) that go with this process. The other is the value process where we attempt to attach a value to an asset based upon its fundamentals: cash flows, growth and risk. For shorthand, I will call those who play the pricing game “traders” and those who play the value game “investors”, with no moral judgments attached to either. The second is that while there is absolutely nothing wrong or shameful about being either an investor  (No, you are not a stodgy, boring, stuck-in-the-mud old fogey!!) or a trader (No, you are not a shallow, short term speculator!!), it can be dangerous to think that you can control or even explain how the other side works. When you are wearing your investor cape, you can be mystified by what traders do and react to, and if you are in your trader mode, you are just as likely to be bamboozled by the thought processes of investors. So, at the risk of ending up with a split personality, let me try looking at Facebook’s acquisition of Whatsapp for $19 billion, with $15 billion coming from Facebook stock and $4 billion from cash, using both perspectives. 
Closing Thoughts
My experience with markets has been that no one has a monopoly on virtue and good sense and that the hubris that leads to absolute conviction is an invitation for a market take-down. To investors who view deals like the Whatsapp acquisition as evidence of irrational exuberance, remember that there are traders who are laughing their way to the bank, with the profits that they have collected from their social media investments. Similarly, for traders who view fundamentals and valuation as games played by eggheads and academics,  recognize that mood and momentum may be the dominant factors driving social media companies right now, but markets are fickle and fundamentals will matter (sooner or later).


Two years ago, Jan Koum, founder of mobile-messaging service WhatsApp, decried online advertising, saying it drives tech companies to write "better code to collect all your personal data." 
On Wednesday, Mr. Koum agreed to sell his company to Facebook Inc., which built the world's second-largest online advertising platform after Google Inc.'s by harvesting information users post on the social network. 
How Mr. Koum and Facebook Chief Executive Mark Zuckerberg navigate that clash may determine the success or failure of the $19 billion deal, the largest ever for a tech startup. WhatsApp will operate independently of Facebook, and Mr. Koum will join Facebook's board, creating a delicate balance of influence. 
The men are divided by more than differing approaches to making money. A legacy of his childhood in Ukraine is Mr. Koum's emphasis on privacy: WhatsApp doesn't collect any personal information other than a mobile-phone number and address book, and it wipes out messages shortly after they are sent. 
Mr. Zuckerberg, by contrast, has riled users by changing Facebook's privacy settings in ways that some thought exposed more of their personal information more widely.