Tuesday, April 9, 2013

Strategic fits should be complemented by fair performance evaluations


This week's lecture talks about Strategic Planning and Evaluating current performance of the organization. In this blog i'll talk about how organizations do (desperate?) strategic acquisitions in view of long-term performance benefits. i.e, the valuations of the target companies are primarily due to the strategic fit they give to the acquiring companies, and nothing else (like strong revenues, healthy profit margins).

There's a very strong rumor going around from couple of days on a potential buyout of WhatsApp by Google. If the same rumors were to be believed, WhatsApp may be valued close to $1 billion. $1B for just one simple instant messaging app.

My knee-jerk reaction when I look at such deals (along with Facebook's Instagram and Microsoft's Skype buyout) is why do these proven and great technology companies go all out to buy 'apps', when they clearly have the resources to make a similar or even better app. Huge existing customer base is definitely the first thing that comes to my mind. But $1 billion only for the customer base, even when there is no clear long-term revenue which give hope of covering the cost, sounds little high.

After looking at few articles and discussions, involving employees from the companies in discussion, there are very interesting reasons why these companies actually bought them. They all are around 'strategic' moves that these companies took. For instance, photo sharing and tagging is 'very' critical in defining the success of Facebook, and they wanted to have a significant presence in the mobile space es[ecially for photo sharing. Instagram with a customer base of 20M fits exactly in to the Facebook's strategy.

There are speculations that Google has a similar reason behind buying WhatsApp. WhatsApp for one, poses a strong competition to Microsoft's Skype, Facebook Messenger, iPhone's iMessage, Viber and any other less known instant messaging tools on mobile platform. Such an acquisition not only gives Google a competing platform in mobile instant messaging space, but also a pseudo native app for instant messaging in Android (like iMessage for iPhone)

While all of this sounds fine and may be a right move, is the valuation in range of billions truly worth it? Especially when there is no fixed revenue model (which generate profit) defined for the target company. Quick look at the current state of such acquisitions show that these acquisitions didn't do any good to the parent companies as yet. That said, while targeting strategic fits is key, companies should also look at the value of the joint entity given the cost it's going to put in to acquire the targets

References:
[1] http://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/
[2] http://techcrunch.com/2011/06/15/facebook-secret-photos-app/
[3] http://business.time.com/2013/04/09/a-year-later-instagram-hasnt-made-a-dime-was-it-worth-1-billion/
[4] http://www.digitaltrends.com/social-media/google-acquiring-whatsapp/
[5] http://dealbook.nytimes.com/2012/04/09/facebook-buys-instagram-for-1-billion/

also,
[5] http://www.quora.com/Facebook-1/Why-did-Facebook-acquire-Instagram
[6] http://www.quora.com/Facebook-Instagram-Acquisition-April-2012/What-about-Instagram-made-it-worth-its-1B-acquisition-by-Facebook

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