One of the biggest business news of 2014 was the acquisition by Facebook of WhatsApp for a whopping $19,000,000,000 making it the biggest acquisition of a business of all time. The purpose of the acquisition is “to dominate messaging on phones and the Web.” OnDevice Research shows that Whatsapp is the leader in messaging among smartphone users and Facebook’s Messenger is second in place. Mark Zuckerberg won’t play second fiddle so he decided to buy the competition. Based on the same premise, Facebook bought Instagram for $1,000,000,000 in 2012.
Instagram and Whatsapp are owned by Facebook but they remain autonomous units within Mr. Zuckerberg’s company. This means that they will operate independently from Facebook, retain their brand name, which is considered a good thing because it doesn’t strain customer relations by reason of the abrupt change. Whatsapp employees are retained as part of the acquisition package, and its co-founder and CEO Jan Koum is now part of Facebook’s board of directors. Such are the effects of this acquisition, but not all acquisitions have these effects; it will all depend upon the agreement between the owners of the purchasing company and the purchased company.
Acquisitions usually result in fresh job opportunities and allows plenty of room for advancement in a larger employment environment or setting. On the negative side, the acquiring company has the prerogative to lay off employees, opponents to mergers and acquisitions also contend that the creation of an even larger company represents creates an imbalance in the marketplace with more power wielded and monopolization of the industry which in turn may strafe off smaller and otherwise viable competition. In acquisitions often smaller brand name products are discarded, and quality control standards may be lowered to cut costs and increase profitability, among other prerogatives it may exercise as the new owner.
The industry hails the acquisition as a remarkable feat and it’s not just because of the astounding cost that Mr. Zuckerberg paid to get Whatsapp into Facebook’s fold. With this acquisition, the increase in stock value of the company seems to be promising. It also gives Facebook an edge over other social networks and may spur competitiveness in the industry as well. In short, it all boils down to strategy, synergy, and talent which are the main whys and wherefores that justify company acquisitions.
Black’s Law Dictionary defines acquisition as “the purchase of one company by another in order to fulfill particular strategic goals related to revenues, market share, product/ service offerings, or competition. An acquisition may be structured as a stock acquisition, where the acquiring company offers investors in the target company a specific price for their common stock, or an asset acquisition, where the acquiring company offers to buy a portion or majority of the target company”.
Although used synonymously as a merger, acquisition is actually not the same as a merger, the latter usually resulting into a new entity. Black’s Law Dictionary defines a merger as the “voluntary co-joining of two firms into one new legal entity on roughly equal terms. Mergers are effected by the pre-merger stock shares exchange for the new firm’s stock. The resources of the two merging entities pool together for the new entity’s benefit. Supplier and customer merger is a vertical integration. Merging competitive entities have a horizontal integration. Owners of each pre-merger firm continue as owners.”
Just any transaction, acquisitions of assets and stocks have advantages and disadvantages. A purchaser must weigh these variables before making decision to acquire a company.
Acquisition of Assets - The purchaser has the advantage of choosing which assets to acquire. He can choose among liquid assets, real estate or intellectual property, or acquire all of these if he wants to. The factors a buyer would consider in choosing the assets to buy would be based on what he thinks will give him more value for his money, its profitability, and the potential sees it. Section 197 of the Internal Revenue Code that the purchase of goodwill – which is defined as the difference between the price of a business and the value of its underlying assets, signifying its capability of generating profits - can be amortized over 15 years and is tax-deductible. In addition to incidental expenses of transferring assets and liabilities, the downside of the process of acquiring assets is that it takes time and money to hire the services of financial assessors who shall evaluate the assets, study in depth the potential of profit, identify the dangers of incurring liability, and more or less state the value of each asset.
Acquisition of Stocks – Purchasing stocks is a straightforward transaction. You gain control of the stocks you purchase as soon as you buy them from a shareholder. Assets and liabilities are normally part of the deal, but a buyer who finds a liability to be onerously unreasonable can always shift the liability back to the seller. The downside of this transaction is that the tax deduction rule on goodwill does not apply to the acquisition of stocks. There is also the danger of purchasing toxic assets or “assets that have experienced a significant drop in value and lack an active market where they can be sold” (as defined by investinganswers.com).
An enormous expense before, during and after negotiations is always a given, but obviously this didn’t perturb Mark Zuckerberg, he wants the company he founded to be number one, so anti-trust issues aside, why not acquire the companies that can make him number one?
The likes of Mark Zuckerberg who have made it big and have a bunch of legal advisers do not need this blog. After all, this is not totally about Mark Zuckerberg, Facebook and Whatsapp; it is just a pure academic discussion about some of the aspects of acquiring a company’s assets and stocks. But you… who knows what the future holds for you? Someday you might be the next Mark Zuckerberg and will be able to afford to purchase big name companies left and right. When that time comes, I hope you won’t forget what we have discussed here… even if you have a team of legal advisers.
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