Whatsapp and Facebook just agreed to a massive business deal, made headlines, shocked the business world, and made a couple of whiz-kids very very very rich.
But they could have done that for $15.6 Billion, or $21.2 Billion, or even just a lousy 5 or 6 Billion bucks.
How are negotiations handled for such huge sums of money?
I’m trying to imagine how the negotiations were carried out:
Two guys sitting at a table in a rented meeting room at the Ramada Inn hotel:
“I want $21 Billion”
“no, sorry, I can only give you $17 Billion”
“how about 20?”
“well, maybe I can go to 18”
" let’s split it at 19 fricking BILLION dollars"
"Okay, <shakes hands, pulls out his checkbook, signs with a flourish> “here you go…now how 'bout if I buy you a drink in the bar to seal it?”
Most business takeovers have some kind of logic. There’s an analysis of the history and stock earnings of the companies involved. Or it may be possible to compare a proposed deal with similar deals in your industry, or even in other industries.
Or maybe in some situations, it’s a unique case, and there simply is no way to establish a fair and logical value.So somebody just decided to take a huge risk and hope it works out.
But how do they reach the specific numbers? How many people are involved in such huge sums, and how long does it take?
I think you don’t quite understand how negotiations happen. In general, both parties have a good idea of what the proposed purchase is worth to them. In very short terms, if the buyers maximum price is above the sellers minimum price, then the two can agree. How flexible those terms are and whether they can actually come to said agreement if another question.
In this case, Facebook probably had analysts and strategists thinking very hard about how much this acquisition would be worth to them over the next five-ten-twenty years. Presumably they believe that’s more than the money they paid.
The press reports said that Jan Koum (CEO of WhatsApp) and Mark Zuckerberg (CEO of Facebook) had been talking for over a year and that Zuckerberg formally made an offer on February 9. And then Koum stopped by Zuckerberg’s house on February 14, interrupting Zuckerberg’s Valentine’s Day dinner with his wife. The two guys then opened and ate the chocolate-covered strawberries Zuckerberg had intended for his wife. (That probably doesn’t answer the OP but I just thought it funny.)
Yeah, I agree with you–In general–the analysts must work very hard. But in this case, nobody has many facts to analyze.
Sure, Whatsapp has millions of users, and Facebook wants those users, hoping that somehow they will add profit. But nobody knows how much.
And Whatsapp is owned by 2 guys, who want to make a profit selling. But they can’t be sure how much, and they don’t have to report to stockholders.
And after the sale, they will have no expenses and no debts, so they should be able to pay off their mortgage, and buy a new Chevy.And even buy some chocolate covered strawberries for the wife.
So everybody is make quesses.
And when you make guesses, you can easily be wrong by 5 or 10 per cent.* And 5 or 10 percent of [spoken in the voice of Carl Sagan] billions and billions[/Carl Sagan] dollars is, well, a whole bunch of money.
And that’s what I have a hard time imagining. It just seems like, when you’re working with figures in the amount of “whole bunches” of money, there ought to be a way to explain why the deal was closed for 19 Billion, and not, say, 19.1 or 18.6 Billion. Or even 15 Billion, or 22 bil.
(*I know, 'cause I’m an experienced guesser!.. You see, when I sold my house, I guessed wrong; …my neighbor had sold for 5% more than me. So I lost a few thousand $–but not a few Carl Sagans
Since sales of tech companies aren’t that uncommon, they probably both looked at the recent history of them and took a guess as to what WA was worth on the open market, i.e. if they went public. Then FB comes in a little lower than that, because that spares the WA owners the annoyance and risk of an IPO, but not too much lower, because the IPO remains an option if WA turns FB down. That is, I think the price has much less to do with what either thinks WA is worth over some long run, and much more with what it’s worth right now, on the public market. A relevant consideration is also whether if they needed to finance the buy – and I don’t think FB needs to, as I think they only need to come up with $5 billion in cash – they could borrow the money with WA as collateral on the bond market. So there, too, the relevant metric is the worth of the company on the public market.
That’s not to say FB doesn’t need to decide for itself that the long-term value of the company exceeds what they’re paying for it, and also that WA doesn’t need to decide that they’ve reached some kind of near apogee here, and aren’t likely to get, say, twice as much in an IPO if they wait 6 more months. But those are both sort of back-end calculations. It’s sort of like going to buy a car: the price is actually set for you by other consumers, who could compete with you for the car. You still have to decide if the car is worth to you personally what it costs. The seller has to decide if the loss of the car is sufficiently compensated at the going price.
As for how many would be involved: as few as possible. Nobody except the tippy-top of WA is going to be especially happy about the sale, because they won’t get fabulously rich and their jobs may be uncertain. A lot of people at FB who have their own ideas about where money should be spent may not be happy, either, and there may be some disruption in their jobs as well. To get to the endpoint, though, you need to have people who own a majority of the shares in both corporations in the know, and on board with it. Everyone else can go to hell.
I was going to mention that article for this paragraph.
There are many ways of evaluating a company with high potential but low current profits. In today’s world, number of users is as good as any. So a price that takes that into account may be a perfectly reasonable way of doing it.
So why $42 and not $33? Well, maybe because Facebook wanted to make sure that Google didn’t get it. Google has all the money in the world and doesn’t mind buying high. Keeping an asset out of the hands of your competitors is a legitimate business tactic that’s worth spending money on.
IIRC, Mark Zuckerberg turned down a $5 billion offer for Facebook when that seemed to be a ridiculously high number. That happened to be the right decision. I have no idea if this is the right number now, and probably he doesn’t either. But since there is no possible way to know the “right” number, finding “a” number has to be good enough.
