Social media pioneer Facebook (NASDAQ:FB) is about 16 years old. And like a lot of teens, it can be charming and rebellious, even whiney. As for Facebook stock, it’s had a pretty good year, as the shares have recovered from the dip caused by the novel coronavirus.
And now, the company has a serious target on its back.
Officials in nearly every state joined the federal government to sue Facebook over significant anti-trust issues. This promises to be a lengthy court battle. And it could affect the portfolios of the owners of Facebook stock.
The Battle Is Beginning
A pair of lawsuits were filed last week. One was initiated by the Federal Trade Commission. The second is a joint effort by 48 states led by New York. The lawsuits want to break up Facebook by basically undoing its acquisitions of Instagram and WhatsApp. It should be noted that these are not recent deals. Facebook acquired Instagram in 2012 for $1 billion and WhatsApp two years later for $19 billion. Federal regulators approved both acquisitions.
The lawsuits claim that Facebook is wrongfully depriving consumers of alternatives by purchasing competitors.
Clearly, owning the two companies added meaningfully to Facebook’s top and bottom lines. And its finances will be pinched if Facebook sells Instagram and WhatsApp.
That potential for a negative impact is why Facebook stock holders need to monitor these two lawsuits. They also need to be patient. Barring some unexpected development, it’s going to be a long time before these lawsuits are resolved. Several lawyers are going to make a lot of money from this case.
It’s Getting Chilly for Facebook
Facebook’s response to the lawsuits was predictable but nonetheless interesting.
The company says the acquisitions were approved by federal anti-trust regulators. By arguing for divesture years later, Facebook says, the federal and state governments will harm all businesses.
I am touched that Facebook cares. I didn’t know its executives worry so deeply about the fate of other companies. They must be continually upset about past anti-trust break-ups. I guess they didn’t notice that the United States economy kept on trucking. (It usually does, after all.)
My indulgence in sarcasm is in response to Facebook’s statements. But one point the company may have about the dispute is government approval.
Facebook General Counsel Jennifer Newstead accused the FTC of seeking to engage in “revisionist history” with the lawsuit. “The government now wants a do-over, sending a chilling warning to American business that no sale is ever final,” she said.
Here’s how Sheryl Sandberg, Facebook’s chief operating officer, linked the points to CNBC:
“Those acquisitions were cleared and if you can buy a company, and eight years, 10 years later, the government can clear them and unwind them – that’s going to be a really big chilling problem for American business…”
Sandberg warned, “we are not going to be competitive around the world.”
Here’s a counterpoint to consider. The issue now is what Facebook did with those companies after the purchases were done. It may not matter that federal regulators approved the acquisitions. If the lawsuits proceed to trial, we might be able to see whether Facebook ended up violating anti-trust boundaries. Investors and taxpayers deserve to know the answer.
The Bottom Line on Facebook Stock
The Federal Trade Commission and 48 states sued Facebook. The anti-trust claims focus on Facebook’s purchases of Instagram and WhatsApp in 2012 and 2014, respectively. The company cried foul, saying the deals had won federal approval.
Anti-trust litigation is complex and the cases usually are lengthy. The owners of Facebook stock should prepare for a long wait for the outcome.
Ultimately, the lawsuits have the potential to disrupt the company’s business model, which is successful if not universally popular. Often, critics paint Facebook as a villain in response to how its site promotes discord.
In the short-run, though, investors who like having social-media companies in their portfolio have an opportunity to buy Facebook stock while it’s under pressure.
In other words, investors should use the lawsuit’s initial impact to their advantage by buying the dip, as they say.
On the date of publication, Larry Sullivan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Larry Sullivan is a veteran journalist in Florida who has covered banking and finance for several years. He is a former investing editor at U.S. News & World Report in Washington D.C.