In the last year, we’ve seen some mega-tech deals come down the pike, such as Comcast’s announcement to buy Time Warner Cable for $45 billion, Verizon’s purchase of Vodafone’s stake in Verizon Wireless for $130 billion, the privatization of Dell for $25 billion. Despite the dollar figures of these deals, the acquirers tended to be large, public, entities of long standing with billion dollar businesses acquiring large, public entities of long standing with billion dollar businesses.
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We’ve also seen billion dollar deals for unique tech products without much revenue. These are standard deals when a large, established company with plenty of resources decides it has a hole in its portfolio that a unique startup can quickly fill and bring about a competitive edge. Google, for instance, said it would buy Nest, a maker of Internet connected thermostats, for $3.2 billion a few weeks ago.
It takes particular conditions in the marketplace to agree to such large deals. Debt tends to be cheap, valuations hardy. When investors reward these potentially risky moves, we may see announcements of large deals in rapid succession.
Though I wouldn’t characterize other megadeals of 2013 and 2014 as irrational, I would in the case of Facebook’s announcement on Wednesday that it will acquire WhatsApp, a mobile messaging company rumored to have generated $20 million in annual sales, for $19 billion.
If the tides turn for Facebook, the WhatsApp deal will not be remembered favorably. At some point, pundits must put rationalizations aside and just look at the numbers. Is the valuation sane? Is Facebook a disciplined acquirer? Allow the Zen of a $19 billion acquisition for a $20 million in sales wash over you.
13 years ago, I began working as an M&A reporter at a startup called The Deal. I had taken a few years off from reporting, so it caught me by surprise when Nortel Networks, a Canadian telecom equipment manufacturer, bought a startup called Alteon Websystems for $8 billion. Alteon made on product, a content web switch, and was rumored to have generated $110 million in annual sales.
I wondered what Nortel was buying in a $110 million business that could make an $8 billion price tag worth it. Nothing was the ultimate answer. It was July 2000, the heady days of the dot.com boom and networks were hot. Nortel’s stock price was $73 per share. The last time I’d written a story about a big, telecom equipment acquisition, it was 1997, and Ascend acquired a mature, public company, Cascade Communications, for less than half what it paid for Alteon.
Three months later, the dot.com bubble burst and Nortel was brought down in part by numerous overpriced acquisitions and goodwill charges in the multiples tens of billions of dollars. It declared bankruptcy in 2009.
I don’t mean to suggest that Facebook is in the same predicament as Nortel. But I think the idea of a crazy acquisition can be like your nose, easy to overlook from the vantage point of your eyes. If Facebook isn’t considering M&A carefully, always keeping in mind return to shareholders, it may have to learn the hard way.
Facebook and WhatsApp did not return requests for comment.