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Proof That Facebook is A Little Nervous About WhatsApp

By Erin Kennedy and Evan Niu, CFA – Feb 23, 2014 at 1:00PM

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Facebook is choosing to pay for WhatsApp mostly in the form of stock. That transfers some future risk to WhatsApp's prior owners, for better or for worse.

Facebook (META 0.50%) is preparing to put down $19 billion to acquire WhatsApp. However, the bulk of that total is comprised of common and restricted stock. To be precise, $15 billion will be equity. Beyond the fact that Facebook only has $11.5 billion in cash right now and couldn't afford an all-cash deal, there's some information in how Facebook decided to structure the deal.

In general, companies are more likely to use their stock as currency when prices are high. Additionally, in using stock as part of the deal, Facebook transfers some future risk associated with the deal to the previous owners of WhatsApp. Those shares will carry the same risk and reward, for better or for worse. In contrast, if a company was extremely confident in a deal's success, it's better to use cash as that allows the acquirer to capture all future value creation.

In this segment of Tech Teardown, Erin Kennedy discusses Facebook's big deal with Evan Niu, CFA, our tech and telecom bureau chief.

Erin Kennedy has no position in any stocks mentioned. Evan Niu, CFA has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. 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.

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