Facebook’s $19.6 billion acquisition of text-messaging
start-up WhatsApp seemed exorbitant when it was negotiated back in February.
But as it turns out, the final price tag on the fifth-largest technology deal
ever turned out to be even higher.
Facebook agreed to pay WhatsApp’s owners primarily in
stock and only $4 billion of the $19.6 billion in cash. Because the deal relied
so heavily on Facebook stock, its final cost was uncertain, reports Steven
Davidoff Solomon in the New York Times. It took about eight months for the deal
to secure regulatory approvals. By the time it closed, on October 6, Facebook’s
stock price had risen from about $68 a share in February to $77.56 a share. As
a result, the final value of the deal climbed from $19.6 billion to $21.8 billion.
WhatsApp employees will be able to begin selling their Facebook shares at the
end of October.
Paying More Than You Should? The way negotiators
pay may affect how much they pay
Thus, Facebook ended up paying $3 billion more because it
issued stock rather than paying for WhatsApp entirely in cash. A few billion
might be “chump change” for Facebook, but the amount clearly had value to the
company’s shareholders, notes Solomon.
The discrepancy between WhatsApp’s initial and ultimate
price to Facebook highlights the fact that the way negotiators pay for their
purchases affects how much they pay for them. As Solomon writes, companies that
plan to pay for their purchases with cash are bound to be more concerned about
overpaying than those that include a significant stock component in their
deals. The hit to their bottom line will feel more “real” if they pay cash than
if they promise stock that won’t be paid out until a later date.
As a result, those that pay cash are likely to offer
their targets less, drive a harder bargain, and get a better deal. Outside
Silicon Valley, acquiring firms appear to recognize this. Cautionary tales from
the technology bubble and bust, such as the AOL/Time Warner merger, are leading
a majority of them—67% in 2013—to pay for their purchases completely in cash,
according to Solomon.
The situation suggests a risk faced by both individuals
and organizations that are thinking about making a significant purchase. When
we plan to pay cash, we are likely to be more frugal, due to our awareness of
how much lighter our wallets and balance sheets will be after the deal is
signed. By contrast, if we are funding the purchase with a loan or with stock,
we may be tempted to overpay just to win the prize. After all, funds that we
won’t have to pay until later can seem like so much “funny money.”
Focusing on Short-Term Costs at a Long-Term Expense
Taken to the extreme, this tendency explodes into a
disaster like the subprime mortgage crisis, where banks gave unqualified
borrowers loans they had no chance of paying off. But all of us are susceptible
to focusing on short-term rather than long-term costs when bidding on a desired
commodity.
Clearly, the first key to avoiding this temptation is to
pay in cash when possible. When that isn’t possible, to consider if this is
reason enough to walk away.
When you are seriously thinking about using long-term
financing to make a major purchase—whether it be a car, a house, or a company—thoroughly
research the commodity’s worth, and consult with financial advisors who have no
stake in the sale to determine what you can realistically afford.
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