What Is Mark Zuckerberg Telling You With His Big Acquisitions?
Mark Zuckerberg seems excited about Facebook’s (NASDAQ:FB) acquisition of Oculus. In a Facebook post, Zuckerberg said, “Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face — just by putting on goggles in your home.”
He then added that, “This is really a new communication platform. By feeling truly present, you can share unbounded spaces and experiences with the people in your life. Imagine sharing not just moments with your friends online, but entire experiences and adventures.” Sounds exciting, huh? Of course it does. But the problem is that with Oculus — as well as WhatsApp — Zuckerberg’s not only pulling out his wallet, but also a boatload of stock.
In a five week span, Facebook has announced plans to spend up to $21.3 billion, including $19 billion for WhatsApp and $2.3 billion for Oculus. Investors have continuously argued the meaning of these two acquisitions, as most note that while WhatsApp may have 465 million monthly active users (MAUs), it earned just $20 million last year. However, the bigger deal — rather than speculating on what these companies may or may not become — is the amount of stock that Zuckerberg has used to purchase these companies.
At the end of 2013, Facebook had $11.5 billion in cash and short-term investments, but combined is spending $4.4 billion of that cash on WhatsApp and Oculus. The remaining $16.9 billion will be paid in common stock and restricted shares. With that said, WhatsApp payout will be given over a period of four years, although an undisclosed bulk will be paid upfront.
Facebook still has over $7 billion in cash after all payouts and with an operating margin of 37 percent, the company accumulates cash quickly. Also, it’s worth noting that debt remains cheap, and with $17.9 billion in assets and just $2.4 billion in total liabilities, Facebook could easily finance debt. This essentially tells investors that Zuckerberg and company believe that Facebook’s stock is overpriced, and gives them the most bang for the buck in terms of acquisitions.
Today, $16.9 billion is nearly 11 percent of Facebook’s market capitalization, and conveniently, since the acquisition of WhatsApp was made public, shares of Facebook have fallen approximately 11 percent. Now, while this decline may have little to do with the use of shares to acquire, it’s possible if not likely that other investors, including at the institutional level, notice the way in which Zuckerberg is using the company’s stock to make acquisitions.
If you are an investor in Facebook, you must remember that $21.3 billion is a lot of money, and one way or another, it’s going to be felt when spent. In this particular case, it appears that Facebook’s stock will be the victim, and given Zuckerberg’s recent track record, don’t be surprised if the multi-billion dollar stock spree doesn’t stop. In that event, Facebook shares might continue to fall.