by Traders Reserve | March 12, 2014 11:20 am
There is a fine line between genius and insanity. Mark Zuckerberg, founder and CEO of social network superstar Facebook (FB), is dangerously flirting with the latter.
I suppose you don’t get to be one of richest men on the planet without being a little bit wacko.
Now, the psychological profile of Zuckerberg has gotten a bit more complicated with the over -the-top acquisition of message firm WhatsApp for $19 billion. With a “B.”
Can you say dot-com bubble re-dux?
In committing 10% of Facebook’s value to WhatsApp, Zuckerberg is betting his company’s future on the success of the deal. It could be his legacy or his albatross, depending on your view.
I’m betting on the latter and here are three reasons why:
Profits, Not Eyeballs, Are What Matters
It’s been some time since we heard about companies building their businesses solely based on eyeballs. Facebook is now doing just that. They’ll worry about profits later. Can you blame them when the market has rewarded such misguided behavior in the past?
While there have been a few companies that were able to survive and thrive with such a model – think Amazon (AMZN) — Facebook is not likely to be one of them. Is that perhaps why Facebook did the WhatsApp deal?
There’s an air of desperation to the transaction that says “we can’t make it on our own so let’s keep buying and buying no matter what the price. Just get the eyeballs and everything will be all right.”
I’m not so sure that will be the case.
Don’t Be Such a Young Punk
Perhaps I am just getting old, but I see Zuckerberg as a lucky young punk. There really wasn’t anything earth-shattering about Facebook rising to the top of the social networking food chain.
Now that he is on the top, this acquisition is designed to keep him there. Instead, it looks like the rich kid going out and buying a hot new sports car – without negotiating, by the way. The transaction is a punk move at a time when being a young punk is not really necessary. That may have served a purpose at the start, but Facebook shareholders will likely have buyer’s remorse when it comes to looking back on this deal.
WhatsApp might be on its way to having a billion users, but can it make a profit? More importantly can it make a profit to justify the price paid? I just don’t see it happening. It’s Zuckerberg’s prerogative to do this deal, but perhaps some restraint might have been the better course.
All Good Bubbles Come to An End
Some of the more ludicrous analysis on the WhatsApp deal goes something like this: Well, Facebook paid X for Instagram and based on the $19 billion paid for WhatsApp, that looks like a great deal right now.
Of course it does. That’s like saying I paid $100 for that old jalopy and $1,000 for the newer jalopy so now it looks like I got that old jalopy for a steal. Well it’s still a jalopy! Give me a break.
The message that the WhatsApp deal delivers definitively that we have a new dot-com bubble. I think Zuckerberg knows it too. Facebook said that it would be taking a pause from deal-making after this WhatsApp buy.
It’s almost as if Zuckerberg woke up from the binge with a massive hangover. He has no interest in drinking anymore. He knows what he did was a big uh-oh. Zuck’s best hope is to digest the meal and hope to god the bubble doesn’t burst on his watch.
I wouldn’t bet on it. The risks are too huge and I’m not even sure what the reward would be.
Written by Jamie Dlugosch
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