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The terms of the deal called for all outstanding shares of WhatsApp stock and options to be canceled in exchange for $4 billion
in cash and 183,865,778 shares of Facebook Class A common stock. The Class A common stock was valued at $12 billion based
7.9% of Facebook’s total outstanding shares, including unvested RSUs. Facebook also agreed to pay a $1 billion breakup fee if the
deal failed to close.
Shocked by the price paid for the deal, Facebook shares fell 5% to $64.70 on the news. Why was Facebook willing to pay so
much for a WhatsApp? The overarching reasons seem to be its spectacular growth potential, the demographic it attracts, and to
preclude others from acquiring it.
Mark Zuckerberg has stated his vision for Facebook is to make the world more open and connected. How? By giving people the
power to share whatever they want and to be connected to whatever they want no matter where they are. This requires building the
WhatsApp’s spectacular growth rate is made more attractive due to the demographic it attracts: teenagers and young adults who
are increasingly using WhatsApp for online conversations outside of Facebook. This trend has accelerated as Facebook has
become popular among their parents, grandparents, and even their bosses at work. This deal is a bet on the future as Facebook
seeks to sustain user growth while recovering the young users it has been losing and retaining its current 1.33 billion user base.
CEO Mark Zuckerberg’s philosophy seems to be to attract users first and then worry about profitability later. The presumption
But the same reasoning would have applied to the dot.com boom of the late 1990s that become the dot.com bust as firms used
overvalued stock to overpay for growth through acquisition. Because they paid too much they were never able to earn the rates of
return their investors required to remain invested or for new investors to buy their shares. The end result was that many internet
startups saw the value of their shares plummet while many others went bankrupt.
In addition to providing an engine for growth of Facebook and for staunching the loss of young users, the other major justification
for purchasing WhatsApp seems to be to keep it out of the hands of its archrival Google. Reportedly, Google had made a $10
billion offer to buy WhatsApp in 2013. In an effort to establish a social media monopoly, Facebook seems to be prepared to buy
out competitors it finds threatening.
Market value per user is a common metric for valuing businesses without significant earnings but which show significant user
growth. The presumption is that sustained user growth will eventually result in future earnings. Using this metric, Facebook paid
about $48 per existing user ($21.8 billion/450 million users) for WhatsApp versus about $33 per user ($1 billion/30 million users)
In an acknowledgment that people are using many different apps to communicate, the 10-year-old Facebook is now pursuing a
“multi-app” strategy. Facebook has become a media conglomerate similar to Disney owning all the best brands and serving all
demographics simultaneously. It plans to operate its brands independently to see which one gets the largest and does not want to
interfere with the formula that has made these brands popular. Especially on mobile phones, the firm intends to splinter into many
smaller, more narrowly focused services, some of which may not even carry Facebook’s brand and may not require a Facebook
account to use. The firm established an internal organization called Creative Labs in 2014 to enable its software engineers to focus
on designing new innovative apps.
WhatsApp brand will be maintained and the business operated largely autonomously from Facebook. Its headquarters will
remain in Mountain View, CA. Jan Koum will join Facebook’s board of directors, WhatsApp’s core messaging product and
Facebook’s existing Messenger app will continue to operate as standalone businesses.
Such startups benefit from the proliferation of web-connected smartphones and the increased availability of such things as
cloud computing which enables young firms to gain access to inexpensive computer server capacity capable of supporting
exploding internet-based communication. For example, the number of mobile messages handled daily by WhatApp’s 35 software
engineers is almost equal to all the messages transmitted by the world’s major telecommunications companies.
With most of WhatsApp users outside the United States, Facebook has an opportunity to reach more people. But this also can
result in increased competition and tension with the world’s largest telecommunications operators such as AT&T in the United
States and Deutsche Telekom in Germany who charge users to send text messages. While Facebook and WhatsApp can
By operating as a media holding company consisting of popular brands, Facebook is not just diversifying its product portfolio,
it is diversifying its business model by keeping WhatsApp ad free with a nominal $1 per year subscriber fee. In doing so, how will
it make money in the future to support its ever increasing overhead and support infrastructure? How will it realize synergies among
the various brands? Will issues of control arise causing the eventual loss of key talent from Facebook?
Discussion Questions
1. Do you believe Facebook paid too much for WhatsApp? Why? Why not? Be specific in identifying the assumptions
underlying your argument.
2. How might existing Facebook shareholders be hurt by the deal? What do current shareholders have to assume about future
earnings growth to benefit from the deal?
3. Given the nature of technology, do you believe it is possible for one firm to dominant the mobile messaging space? Explain
your answer.
Answer: No, since the barriers to entry are relatively low. Barriers to entry include factors making it expensive or in some way
inhibit other firms from entering a market. They can include the brand names, distribution channels, and proprietary
technologies of existing competitors within an industry.
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4. Do you believe that Facebook is justified in its aggressive acquisition strategy? What are the assumptions implicit in this
strategy? Are they credible? Why? Why not?
5. Describe how Facebook has chosen to deal with cultural differences that may exist between it and the firms it acquires? What
are the advantages and disadvantages of Facebook’s approach to dealing with cultural differences?
Answer: Cultural differences in the context of corporations refer to beliefs and behaviors found acceptable with a firm. The
ten-year old Facebook is becoming larger and more bureaucratic, moving away from its entrepreneurial roots. To attempt to
preserve the entrepreneurial nature of the firms in which it invests, Facebook has become a media holding company in which
it operates a series of largely autonomous businesses it owns.
6. What alternatives to acquisition did Facebook have in dealing with WhatsApp? Why was acquisition the preferred option?
Answer: In principle, Facebook could have pursued a “go it alone” strategy or partnered with WhatsApp. Facebook did pursue
the first option and intensified its internal efforts after being rebuffed by SnapChat. However, these efforts to create a
proprietary mobile messaging system failed to get traction among significant numbers of users. To pursue a partnership, each
Consolidation in the Supermarket Industry
Key Points
• Commodity businesses such as groceries compete largely on the basis of price due to the price sensitivity of their
customers.
• Lower prices generally require aggressive cost reduction.
• Cost reduction through economies of scale in operations and purchasing often is achieved through industry consolidation.
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investor group led by private equity partnership Cerberus Capital Management acquired from SuperValu the remaining
Albertsons’s stores it did not already own as well as Acme Markets, Jewel-Osco, Shaw’s and Star Markets brands. Most of
Albertsons’s operations had been acquired by Cerberus, CVS Pharmacy, and SuperValu Stores in 2006.
Despite efforts to streamline operations by divesting some of its smaller less profitable units including its Canadian operations
and Dominick’s stores in Chicago, Safeway was unable to materially improve its profitability. The outlook for the firm appeared
grim. With modest excess cash flow and borrowing capacity, the firm’s strategic options were limited. Achieving more rapid
growth by substantially updating its stores and by expanding regionally seemed out of the question. Following a review of its
remaining options including more aggressively downsizing its operations, the firm’s board concluded that selling the firm to a
strategic buyer would make the most sense. The most attractive strategic buyer would be one with “deep pockets,” a willingness to
invest in the firm, and whose existing operations were sufficiently similar to offer the prospect of substantial synergies.
HP Implements a Transformational Strategy, Again and Again
_______________________________________________________________________________________________________
Key Points
Failure to develop and implement a coherent business strategy often results in firms reacting to rather than anticipating changes in
the marketplace.
Firms reacting to changing events often adopt strategies that imitate their competitors.
These “me too” strategies rarely provide any sustainable competitive advantage.
_______________________________________________________________________________________________________
Transformational, when applied to a firm’s business strategy, is a term often overused. Nevertheless, Hewlett-Packard (HP), with
its share price at a six-year low and substantially underperforming such peers as Apple, IBM, and Dell, announced what was billed
as a major strategic redirection for the firm on August 18, 2011. The firm was looking for a way to jumpstart its stock. Since Leo
Apotheker took over as CEO in November 2010, HP had lost 44% of its market value through August 2011. A transformational
announcement appeared to be in order.
HP, the world’s largest technology company by revenue, announced that, after an extensive review of its business portfolio, it
had reached an agreement to buy British software maker Autonomy for $11.7 billion. The firm also put a for-sale sign on its
personal computer business, with options ranging from divestiture to a spinoff to simply retaining the business. HP said the future
of the PC unit, which accounted for more than $40 billion in annual revenue and about $2 billion in operating profit, would be
Investors greeted the announcement by trashing HP stock, driving the share price down 20% in a single day, wiping out $16
billion in market value. While some investors may be sympathetic to moving away from the commodity-like PC business, others
were deeply dismayed by the potentially “value-destroying” acquisition of Autonomy, the clumsy handling of the announcement
of the wide range of options for the PC business, and HP’s disappointing earnings performance. By creating uncertainty among
potential customers about the long-term outlook for the business, HP may have succeeded in scaring off potential customers.
In contrast to the mixed results of the Compaq and Palm acquisitions, HP’s purchase of Electronic Data Systems (EDS) for
$13.9 billion in 2008 substantially boosted the firm’s software services business. IBM’s successful exit from the PC business early
in 2004 and its ability to derive the bulk of its revenue from the more lucrative services business has been widely acclaimed by
investors. Prospects seemed good for this HP acquisition. However, in an admission of the firm’s failure to realize EDS’s
potential, HP in mid-2012 wrote off $8 billion of what it had paid for EDS.
HP has purchased 102 companies since 1989, but with the exceptions of its Compaq and its $1.3 billion purchase of VeriFone,
it has not paid more than $500 million in any single deal. These deals were all completed under different management teams. Carly
Fiorina was responsible for the Compaq deal, while Mark Hurd pushed for the acquisitions of EDS, Palm, and 3Par. Highly
respected for his operational performance, Hurd was terminated in early 2010 on sexual harassment charges.
27
In mid-December 2011, HP announced that it would also reverse its earlier decision to discontinue supporting webOS and
stated that it would make webOS available for free under an open-source license for anyone to use. The firm will continue to make
enhancements to the webOS system and to build devices dependent on it. By moving to an open-source environment, HP hopes
others will adopt the operating system, make improvements, and develop mobile devices using webOS to establish an installed
Discussion Questions
1. Discuss the advantages and disadvantages of fully integrating business units within a parent firm? Be specific.
Answer: Increasing integration among businesses makes significant cost savings and productivity improvements possible.
For example, operating units can share overhead departments such as customer support, IT, distribution, and purchasing.
Moreover, parts and components may become interchangeable reducing design and purchase costs. To the extent parts are
2. Discuss the impact of HP’s strategic reversals over the last decade on its various constituencies such as customers,
employees, stockholders, and suppliers. Be specific.
Answer: While it is important to recognize the need to change inappropriate strategies, the frequency with which HP
changed strategic direction had to negatively impact its major constituencies. Customers had to be confused as to which
businesses HP was committed to for the long-run. This no doubt would hurt sales if customers were concerned about
3. Discuss the strategic advantages and disadvantages of diversified versus relatively focused firms? Be specific.
Answer: While HP’s reliance on two significantly different target customer groups (consumer and business) may smooth
earnings, it also results in diluting available capital by supporting multiple product and service offerings and inhibits
4. To what do you attribute the inconsistent and incoherent strategic flip-flops at Hewlett-Packard during the last decade? Be
specific.
Answer: It is unclear whether the inability to implement and sustain a coherent strategy at HP was due to the poor quality
of senior management, excessive turnover at the top, poor decisions made by the board of directors, or some combination
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Years in the Making: Kinder Morgan Opportunistically Buys El Paso Corp. for $20.7 Billion
______________________________________________________________________________________________________
Key Points
Companies often hold informal merger talks for protracted periods until conditions emerge that are satisfactory to both parties.
Capital requirements and regulatory hurdles often make buying another firm more attractive than attempting to build the other
firm’s capabilities independently.
______________________________________________________________________________________________________
Using a combination of advanced horizontal drilling techniques and hydraulic fracturing, or “fracking” (i.e., shooting water and
chemicals deep underground to blast open gas-bearing rocks), U.S. natural gas production has surged in recent years. As a result,
proven gas reserves have soared such that the Federal Energy Information Administration estimates that the overall supplies of
natural gas would last more than 100 years at current consumption rates. But surging supplies have pushed natural gas prices to $4
The increase in energy supplies has strained current pipeline capacity in the United States. Today more than 50 pipeline
companies transport oil and gas through networks that do not necessarily transport the fuel where it is needed from where it is
being produced. For example, pipeline construction in the Marcellus shale field in Pennsylvania has not kept pace with drilling
activity there, limiting the amount of gas that can be sent to the northeast. In the Bakken field in North Dakota, producers are
Kinder Morgan’s stock had been declining throughout 2011, and the firm was looking for a way to jumpstart earnings growth.
The acquisition offers Kinder both the scale and the geographic disposition of pipelines necessary to support the burgeoning
supply of shale gas and oil supplies. The acquisition makes Kinder the largest independent transporter of gasoline, diesel, and other
petroleum products in the United States. It will also be the largest independent owner and operator of petroleum storage terminals
and the largest transporter of carbon dioxide in the United States. The combined firms will operate the only oil sands pipeline to
the west coast. To attempt to replicate the El Paso pipeline network would have been time consuming, required large amounts of
capital, and faced huge regulatory hurdles.
29
Kinder paid 14 times El Paso’s last 12 months’ earnings before interest, taxes, depreciation, and amortization of $2.67 billion.
Investors applauded the deal by boosting Kinder’s stock by 4.8% to $28.19 on the announcement date. El Paso shares climbed
25% to $24.81. For each share of El Paso, Kinder paid $14.65 in cash, .4187 of a Kinder share, and .640 of a warrant entitling the
bearer to buy more Kinder shares at a predetermined price. The purchase price at closing valued the deal at $26.87 per El Paso
Discussion Questions
1. Who are Kinder Morgan’s customers and what are their needs?
2. What factors external to Kinder Morgan and El Paso seemed to drive the transaction? Be specific.
Answer: With shale oil and gas fields in Pennsylvania, North Dakota and Texas providing an increasing share of the
nation’s energy supplies, pipeline customers needed easier and more efficient access to these new energy supplies. The
3. What factors internal to Kinder Morgan and El Paso seemed to be driving the transaction? Be specific.
Answer: In view of the regulatory and licensing hurdles as well as the huge capital requirements, buying El Paso
represented a cheaper way of expanding Kinder Morgan’s core business (oil and gas pipeline distribution) than attempting
4. How would the combined firms be able to better satisfy these needs than the competition?
5 Do you believe the transaction can be justified based on your understanding of the strengths and weaknesses of the two
firms and perceived opportunities and threats to the two firms in the marketplace? Be specific.
Answer: Yes. The two firms’ pipeline networks were highly complementary in that there was relatively little duplication
From a Social Media Darling
to an Afterthought—The Demise of Myspace
_____________________________________________________________________________________
Key Points
It is critical to understand a firm’s competitive edge and what it takes to sustain it.
Sustaining a competitive advantage in a fast-moving market requires ongoing investment and nimble and creative decision
making.
In the end, Myspace appears to have had neither.
______________________________________________________________________________
A pioneer in social networking, Myspace started in 2003 and reached its peak in popularity in December 2008. According to
ComScore, Myspace attracted 75.9 million monthly unique visitors in the United States that month. It was more than just a social
network; it was viewed by many as a portal where people discovered new friends and music and movies. Its annual revenue in
2009 was reportedly more than $470 million.
Myspace captured the imagination of media star, Rupert Murdoch, founder and CEO of media conglomerate News Corp. News
Corp seemed to view the firm as the cornerstone of its social networking strategy, in which it would sell content to users of social
Adobe’s Acquisition of Omniture: Field of Dreams Marketing?
On September 14, 2009, Adobe announced its acquisition of Omniture for $1.8 billion in cash or $21.50 per share. Adobe CEO
Shantanu Narayen announced that the firm was pushing into new business at a time when customers were scaling back on
purchases of the company’s design software. Omniture would give Adobe a steady source of revenue and may mean investors
would focus less on Adobe’s ability to migrate its customers to product upgrades such as Adobe Creative Suite.
31
In recent years, a business model has emerged in which customers can “rent” software applications for a specific time period by
directly accessing the vendors’ servers online or downloading the software to the customer’s site. Moreover, software users have
shown a tendency to buy from vendors with multiple product offerings to achieve better product compatibility.
Omniture makes software designed to track the performance of websites and online advertising campaigns. Specifically, its
Web analytic software allows its customers to measure the effectiveness of Adobe’s content creation software. Advertising
agencies and media companies use Omniture’s software to analyze how consumers use websites. It competes with Google and
other smaller participants. Omniture charges customers fees based on monthly website traffic, so sales are somewhat less sensitive
than Adobe’s. When the economy slows, Adobe has to rely on squeezing more revenue from existing customers. Omniture
benefits from the takeover by gaining access to Adobe customers in different geographic areas and more capital for future product
development. With annual revenues of more than $3 billion, Adobe is almost ten times the size of Omniture.
Adobe anticipates that the acquisition will expand its addressable market and growth potential. Adobe anticipates significant
cross-selling opportunities in which Omniture products can be sold to Adobe customers. With its much larger customer base, this
could represent a substantial new outlet for Omniture products. The presumption is that by combining the two firms, Adobe will be
able to deliver more value to its customers. Adobe plans to merge its programs that create content for websites with Omniture’s
technology. For designers, developers, and online marketers, Adobe believes that integrated development software will streamline
the creation and delivery of relevant content and applications.
The size of the market for such software is difficult to gauge. Not all of Adobe’s customers will require the additional
functionality that would be offered. Google Analytic Services, offered free of charge, has put significant pressure on Omniture’s
earnings. However, firms with large advertising budgets are less likely to rely on the viability of free analytic services.
Adobe also is attempting to diversify into less cyclical businesses. However, both Adobe and Omniture are impacted by
fluctuations in the volume of retail spending. Less retail spending implies fewer new websites and upgrades to existing websites,
which directly impacts Adobe’s design software business, and less advertising and retail activity on electronic commerce sites
negatively impacts Omniture’s revenues. Omniture receives fees based on the volume of activity on a customer’s site.
Discussion Questions:
1. Who are Adobe’s and Omniture’s customers and what are their needs?
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Answer: Adobe’s customers include anyone interested in developing Web content that is readable on PCs, Apple
computers, and other computer platforms as well as website designers. There needs would include ease of use, flexibility,
2. What factors external to Adobe and Omniture seem to be driving the transaction? Be specific.
Answer: Such factors include the emergence online renting of software and a desire by larger customers to license
3. What factors internal to Adobe and Omniture seem to be driving the transaction? Be specific.
Adobe’s core skills were in the area of developing Web design software, licensing such software to customers and
4. How would the combined firms be able to better satisfy these needs than the competition?
Answer: By offering multiple products, Adobe might be able to provide better product compatibility than its competitors.
Customers have in the past been willing to buy design products as needed and measurement products as needed.
5. Do you believe the transaction can be justified based on your understanding of the strengths and weaknesses of the two
firms and perceived opportunities and threats to the two firms in the marketplace? Be specific.
Answer: No. The two firms had significantly different core skills. Adobe specialized in developing Web design software
sold under the conventional licensing model while Omniture developed optimization and measurement software
distributed under a subscription model. It is unclear if sufficient technology transfer can take place between the two firms
CenturyTel Buys Qwest Communications to Cut Costs and Buy Time
as the Landline Market Shrinks
Key Points:
• Market segmentation can be used to identify “underserved” segments which may sustain firms whose competitive
position in larger markets is weak.
• A firm’s competitive relative is best viewed in comparison to those firms competing in its served market rather than with
industry leading firms.
____________________________________________________________________________________________
In what could best be described as a defensive acquisition, CenturyTel, the fifth largest local phone company in the United States,
acquired Qwest Communications, the country’s third largest, in mid-2010 in a stock swap valued at $10.6 billion. While both firms
are dwarfed in size by AT&T and Verizon, these second-tier telecommunications firms will control a larger share of the shrinking
landline market.
