Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Snap Could Have Been Facebook's Most Expensive Acquisition Ever

By Evan Niu, CFA - Dec 26, 2018 at 1:41PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Even more than WhatsApp.

Snap ( SNAP -0.73% ) CEO Evan Spiegel famously turned down a $3 billion acquisition offer from Facebook ( FB -4.27% ) back in 2013, a puzzling move that turned out to be the right decision, as Snap went public last year at a valuation of about $24 billion. Even with shares now trading around $5, the Snapchat parent is valued at nearly $7 billion. The Wall Street Journal published a report on Spiegel over the weekend, which included several new revelations, including that former CFO Drew Vollero left in part because of Spiegel's fixation with developing hardware.

Facebook was still interested in acquiring the upstart social media competitor as recently as 2016, according to the report, which would have made it Facebook's most expensive acquisition ever.

Mark Zuckerberg speaking on stage

Mark Zuckerberg at F8 2018. Image source: Facebook.

Facebook would have had to pay over $25 billion

While negotiations never progressed to discussing specific prices, the news is still notable for a few reasons. The fact that Facebook was even open to acquiring Snap in 2016 is alarming, as many investors were already expecting Snap to go public in the near future with a valuation of around $25 billion. After being rebuffed at $3 billion three years prior, the astronomical increase in how much Facebook would have to pay in 2016 should have been enough to dispel any acquisition interest.

That's especially true since Facebook already knew in 2016 that Snap was struggling with user growth, thanks to competitive insights derived from its VPN spying app, Onavo Protect. Facebook closed its largest acquisition to date in late 2014, the $19 billion purchase of WhatsApp that the company is now desperate to monetize. Incidentally, data collected with Onavo Protect also guided the decision to acquire WhatsApp.

WhatsApp logo

WhatsApp is Facebook's largest acquisition to date. Image source: WhatsApp.

If Facebook had been able to acquire Snap for over $25 billion, it would have superseded WhatsApp.

Goodwill hunting

Furthermore, if Facebook had made the blockbuster acquisition, the hypothetical deal would have resulted in yet another ginormous spike in goodwill. I'm still worried about the $15 billion in goodwill that Facebook recorded for the WhatsApp deal, as that may need to be written down in the future if WhatsApp fails to prove its value. The prospect of adding more than $20 billion in goodwill to Facebook's balance sheet is nothing short of terrifying.

For reference, the book value of Snap's stockholders' equity at the end of 2016 was just $1.5 billion, according to the company's IPO prospectus. Goodwill is calculated as the difference between purchase price and the fair value of net assets acquired; even with some adjustments to derive fair value instead of book value, we'd still be talking about over $20 billion in goodwill and intangible assets.

With as poorly as Snap has operated since going public, Facebook (and its shareholders) dodged a massive bullet by not acquiring the company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$310.60 (-4.27%) $-13.86
Snap Inc. Stock Quote
Snap Inc.
SNAP
$47.26 (-0.73%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
656%
 
S&P 500 Returns
144%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/02/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.