The CMA Just Ordered Meta to Sell Giphy. How Will This Impact Shareholders?

The U.K.'s Competition and Markets Authority (CMA) just reaffirmed a previous decision against Meta Platforms (META 0.43%), namely that the social media giant will have to unwind its early-2021 acquisition of Giphy. GIFs (an image or short video animation) aren't exactly big business, but the CMA is making this order in the name of keeping advertising open and fair in the U.K. 

The CMA came to this conclusion in November 2021, which Meta (then still known as Facebook) challenged. After further review, the regulatory organization is upholding its command. Meta has said it will abide. What does this mean for Meta shareholders?

It's more than just the money

The CMA could be setting a new precedent here. This is the first time a regulatory body has ordered a big tech company to backtrack a prior acquisition. Meta is dealing with a number of legal matters from regulators, like a lawsuit in the U.S. from the Federal Trade Commission (FTC) to unwind the company's now-nearly-decade-old purchases of Instagram and WhatsApp. The FTC is also trying to block Meta from acquiring virtual reality game developer Within Unlimited.

What's interesting here, though, is that the CMA (a U.K. institution) is making this decision for two American companies. Nevertheless, given the global reach of the internet, Meta and Giphy still fall under U.K. jurisdiction. That explains why Meta is backing down and complying with the order to sell Giphy. 

Will this set a new precedent for big tech and how it's treated by regulators, especially in the U.K. and European Union (EU)? Perhaps. Regulators on the other side of the Atlantic have been far more willing (and successful) in levying orders and fines against Meta -- as well as fellow internet giant Alphabet. Alphabet has paid billions in fines to EU regulators over the years. 

But unwinding past acquisitions is another matter entirely. Giphy isn't exactly some critical core component of Meta's operations or aspirations. However, with other regulators eyeing bigger shake-ups at Meta and big tech companies, this is a development worth keeping an eye on, as it could lead to more disruptive divestitures.

How much will this cost Meta?

Giphy was acquired in May 2020, and was later revealed to have cost Meta $316 million (according to company filings with the SEC).

For the sake of context, Meta had $40.5 billion in cash and short-term investments at the end of June 2022, another $6.5 billion in owned equity securities, and no debt. Meta is dealing with fast-rising competition from TikTok, as well as with Apple's privacy updates, which are lowering the value of digital ads in the iOS device ecosystem. Meta is also investing heavily in "the metaverse" and its 3D immersive apps and VR headsets used to access them. Despite all this, Meta still generated an operating profit margin of 29% in Q2 2022. 

In other words, Meta will be ok without Giphy. However, selling Giphy will still have some financial implications. It's hard to say just how much someone else might want to purchase Giphy for, if at all. The $315 million price tag back in 2020 was during a different era when money was easier to come by. Governments are ditching 0% interest rate policies, which is lowering the valuation of businesses. With the U.S. Federal Reserve aggressively hiking interest rates, the CMA's decision will likely mean Meta will be selling Giphy for a steep loss. In hindsight, Meta would have been better off complying late in 2021 when the CMA originally handed down its judgment.

Additionally, the CMA has also ordered that Meta will need to deposit at least $75 million in cash with Giphy. And since Meta shuttered Giphy's own advertising business post-acquisition, the CMA is also requiring Meta to rearm Giphy with the ability to provide GIF-based ads. This will further increase the financial impact on Meta. And absent any track record of stand-alone money-generating ability, who would even want to take a gamble on Giphy? A potential suitor would likely be another big social media business. Selling to a rival (TikTok, Snap, Twitter, etc.) doesn't exactly help make access to digital ads more open and fair. Plus, even prior to the acquisition, Meta claimed half of Giphy's traffic came from its own social apps. As such, detached from Facebook, Instagram, and WhatsApp, Giphy's potential value is lessened even more.

I suspect Meta will announce a loss of at least a few hundred million dollars once this is all said and done.

Basically, the CMA might simply be putting the nail in the coffin for GIFs. The internet has been moving on from these silly images anyways, but in complying with the order, Meta might have to realize a small but notable loss. It could also ramp up efforts to bust up big tech companies. With all of that in mind, investors should pay close attention to how this story continues to unfold.