How Facebook-WhatsApp Deal Can be a Winner

Spending billions to buy a technology product or brand is a huge risk that does not always pay off for the acquiring company.

Feb 21, 2014 at 1:57PM

Facebook's (NASDAQ:FB) acquisition of WhatsApp may be the biggest tech deal of all time, but spending huge amounts of money to acquire a digital business does not guarantee success. It's not the health of the acquired company before it was bought that determines whether a deal works, but what the buyer does with its new toy.

In many cases, doing as little as possible has met with the strongest results

Running your company is one thing

Just because a CEO is good at running his company does not mean he will be good at running another. Facebook, in both its purchase of WhatsApp and its previous acquisition of Instagram, left the original management in charge. At the time the deal was announced, Facebook took pains in its release to reassure the WhatsApp user base that it wasn't going to mess with what was already working.

Facebook fosters an environment where independent-minded entrepreneurs can build companies, set their own direction and focus on growth while also benefiting from Facebook's expertise, resources and scale. This approach is working well with Instagram, and WhatsApp will operate in this manner. WhatsApp's brand will be maintained; its headquarters will remain in Mountain View, CA; Jan Koum will join Facebook's Board of Directors; and WhatsApp's core messaging product and Facebook's existing Messenger app will continue to operate as stand-alone application.

That's a sensible strategy that protects WhatsApp from becoming a second-class citizen at Facebook simply because it's not Facebook. Of course the two companies need to work together and capitalize on joint opportunity, but buying a product and ignoring the people, ideas, and philosophies behind it can lead to failure.

Learn from Yahoo!

Under new CEO Marissa Mayer, Yahoo! (NASDAQ: YHOO) is taking a Facebook-like hands-off approach with its recent acquisition of Tumblr. But it may have messed up more expensive acquisitions than any other tech company. In large part, these deals failed because the products were bought with the idea of melding them into Yahoo! 

For example, in 1999, Yahoo! spent $5.7 billion buying, which in addition to making Mark Cuban very rich and famous, was according to ZDNet, supposed to "put Yahoo back on the broadband map, after it was in danger of falling by the wayside."

Instead, the company never successfully integrated the product and, according to a 2013 Wired article, "the service was rebranded Launchcast and has cycled through multiple corporate partners as better ideas – from the first Napster to Spotify – have made the very idea of 'broadcasting' on the Internet obsolete." no longer exists and the URL now redirects to

The company also failed in its $3.6 billion acquisition of Geocities (which is now defunct) and in buying Hotjobs, which it purchased for $436 million and later sold for $225 million

Separate identities

Even when a company buys another and does not go to the extreme of letting it keep a separate headquarters and management structure, letting an acquired brand maintain its identity seems to be a positive. Microsoft (NASDAQ:MSFT), for example, paid $8.5 billion for Skype, which at the time according to Huffington Post, had lost $7 million in 2010 on revenues of $860 million. But after buying it, while Microsoft did bring the company to its Redmond, Wash., headquarters, it left CEO Tony Bates in charge.

The product didn't become Windows Caller or Office Video Chat -- it stayed Skype. That appears to have paid off as in February 2013, Bloomberg reported that Microsoft expected to take in $2 billion in revenue through its Skype division.

The same approach was taken in Google's (NASDAQ:GOOGL) purchase of YouTube and eBay's (NASDAQ:EBAY) purchase of PayPal. In fact, those brands, while integrated with their parent companies, have such independent identities that it seems unlikely many current users even know of the association.

It's the acquirer that matters

Would have evolved into something that still exists if Google had bought it? Would Skype have died if it ended up under the Yahoo banner?

With the Internet and its audience rapidly changing, in many ways it's about the ability of the company doing the acquiring to adapt and evolve its purchase that makes these deals successful or failures. Facebook has show an ability to buy a successful brand (as it did with Instagram) and let it flourish under new owners.

With WhatsApp, Facebook gets a huge platform that -- by some metrics -- is hugely successful. Yes, ultimately the brand needs to make more money, but Zucerkberg and company are taking the right approach by stepping back. Letting WhatsApp's people continue to do what is already working while the two companies learn from each other should make both brands stronger.

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Daniel Kline is long Microsoft. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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