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FB Stock, WhatsApp and the Mobile Arms Race – Buyer Beware

Facebook (FB) just made a big acquisition of mobile messaging company WhatsApp for $19 billion.

facebook-whatsapp-buyoutAnd already, the web is abuzz with talk about how the Facebook buyout of WhatsApp could be a big overpayment, considering the fact that FB stock sold off about 3% after the open and considering the total price tag is about 11% of Facebook’s total market cap.

I won’t bother digging into the specifics of Zuckerberg paying big bucks for WhatsApp, how it fits in with FB stock and Facebook advertising plans or how to trade this news in both the short and the long term.

facebook-earnings-stock-fbThe bottom line is that’s all rampant speculation anyway. After all, nobody thought Google (GOOG) was in its right mind paying $1.65 billion for an unprofitable YouTube back in 2005, marking the biggest acquisition in the company’s history. Just look how that has turned out almost a decade later.

Instead, what I’d like to discuss is the risk of a new bubble in a specific corner of the tech market as big players race to snap up mobile startups.

It seems that lately, simply having a big mobile user base — regardless of any plan to make money on those users — is enough to win a 10-figure price tag for your business.

The amount of money flying around, the speed of acquisitions and the need to one-up others in the space has resulted in a digital arms race that is great for venture-backed app creators cashing in on a big sale … but dangerous for investors in legacy tech stocks that are doing the buying.

Little Short-Term ROI, Little Long-Term Visibility

Mobile is undoubtedly all the rage in this “post-PC age,” and nobody wants to be left behind.

Similarly, the tech stocks that survived the dot-com era are now looking ahead to a new generation of competition that could threaten their “old” digital models — and nobody wants to let any of these upstarts get big enough to be a serious threat, so buyouts are often defensive moves as well as offensive ones to find growth.

But think about the problem with big buyouts based on what’s hot now and often incorrect assumptions about where the marketplace is headed.

Think about Yahoo (YHOO) and its$5.7 billion buyout of Broadcast.com in 1999, during the dot-com heyday. The idea of Internet video was way ahead of its time and certainly a precursor to services like Netflix (NFLX) … but snail-like dial-up access was a practical limitation, and the content library was meager. The vision was sound, but the practical limitations were too big to overcome.

Or think about News Corp (NWSA) buying MySpace for $580 million in what Rupert Murdoch himself has characterized as a “huge mistake.” Social media held big promise in 2005 … but MySpace itself clearly did not.

Worst of all, think about AOL (AOL) and its doomed $162 billion megamerger with Time Warner (TWX). The idea was that the Internet was the way of the future (it was) and that Time Warner needed to look beyond its legacy business for growth (it did) … but even being right about the general direction of media didn’t mean that shareholders cashed in or that the much-hoped-for growth materialized.

In all of these instances, someone laughed all the way to the bank regardless of the outcome while shareholders were left holding the bag in the wake of big-time buyouts.

Sure, there area handful of big internet deals that have been proven to pay off. The aforementioned YouTube buyout, for instance. Or if you want to broaden the definition of  “Internet company,” maybe we can include eBay (EBAY) and its  $1.5 billion buyout of PayPal in 2002.

But the point is, there aren’t too many $500 million-plus acquisitions among Internet companies that have withstood the test of time and unlocked any real shareholder value for those invested in the buyer.

That’s because the Internet has rapidly evolved in the last decade, and will continue to do so — meaning what’s hot now might not be what’s hot in the future, and visibility to that end is extremely limited.

One school of thought, apparently, is to make a ton of buyouts and hope that something sticks … but you have to wonder if for some companies, they would have been better off not making as many moves.

Great for Startups, Risky for Large Cap Tech

For some reason, there’s an urge among tech investors to see their favorite large-cap tech holdings in the hunt for these small, sexy companies. The theory, I suppose, is that one of these acquisitions could unlock a whole new area of revenue and profit growth (like YouTube or PayPal) and result in huge gains.

But the reality is the huge gains are most often made by the startups that sell out. Early investors and staff at WhatsApp know exactly what I’m talking about.

Just don’t fool yourself into thinking this mobile/Internet arms race is good for you as a retail investor. There’s a lot of money out there, but you aren’t likely to share in it given the history of big-time Internet acquisitions that have crashed and burned.

In fact, WhatsApp apparently turned down a $10 billion offer from Google — and some pundits think that even this $19 billion deal was less than it could have squeezed bigger Internet companies for.

And surely we’ll see more companies like SnapChat, which will turn down multibillion-dollar offers until the paydays get too large to say no to.

But that just means shareholders in the purchasing companies will continue to have little power and a lot to lose in this environment where everyone is racing to buy hot mobile companies with no concern about how or when they will contribute to the business.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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