WhatsApp and Facebook’s Try-Before-You-Buy M&A Strategy
Why Facebook Chooses to Compete with Companies They Plan to Acquire
Facebook acquired WhatsApp in what could be one of the most massive exits in history, not to mention the most beautiful rags-to-riches story the Silicon Valley has ever seen. While we’re all kicking ourselves over missing out on the $19B in cash and stock that the 55 WhatsApp employees are now enjoying, our minds naturally wander to “who’s next.”
WhatsApp’s acquisition could be evidence for a unique M&A tactic that Facebook has been using recently for its mobile app acquisitions: try before you buy. If it’s correct, Flipboard could be next up to the cash in.
Facebook has been vocal in its efforts to modularize its platform on mobile. Instead of there being a single Facebook app, it is being separated out into stand-alone applications relevant to different feature sets and user behaviors such as communication and photo sharing.
Since Facebook was not originally built as a modular platform, the question naturally arises, “How should Facebook approach splitting itself up? Build anew or buy?”
Looking back on recent M&A activity aimed at building out Facebook’s mobile app ecosystem, the answer seems to be… “yes.” Facebook has been simultaneously building its own standalone applications and acquiring existing ones. What is interesting is that what they build often competes directly with what they buy:
- Facebook Camera was released right around the time that Faceook acquired Instagram, but was under development before the offer was made. Zuckerberg said that Camera, whose features are almost identical to Instagram’s, should give Instagram some “healthy compeition.”
- Facebook Messenger has a similar value prop as WhatsApp — you can message anyone from anywhere in the world over a data network or internet. While Zuckerberg claims that Messenger and WhatsApp will serve different purposes post acquisition, they will still inevitably continue to cannibalize each other in some form or another.
- Facebook Poke, a blatant ripoff of Snapchat, was built in part by Zuckerberg himself to compete with the company that had just turned down a massive acquisition offer. After a dramatic series of funding rounds and higher acquisition offers, Snapchat still remains independent today.
- Facebook Paper is a social news aggregation application that was released fairly recently. With its beautiful interface, it has been hailed as a Flipboard-killer by many. But if we follow the pattern, its existence could suggest Facebook is actually interested in acquiring Flipboard, which shares many of the same features and even UI intricacies.
So, why would Facebook battle it out with companies they are planning to buy anyway?
The Benefits of Try-Before-You-Buy M&A
The act of competing with a prospective M&A has a number of benefits both in evaluating and negotiating the M&A as well as preparing for the M&A integration itself.
- Kicking the Tires: Competition can help evaluate whether or not a startup is actually a significant threat. If users easily move away from a startup to the incumbent’s competing platform, then an M&A isn’t necessary. Facebook built Poke in a dramatic move to try to test just that for Snapchat. Unfortunately, Snapchat passed the test and turned down subsequent acquisition offers.
- Driving Down Price: While the ethical implications here are questionable, threatening a startup with competition can drive the buy price down if executed successfully. An exit opportunity is a whole lot more enticing when a major incumbent with plentiful resources is building your direct competitor.
- Understanding the Space: Building an application similar to one being considered for acquisition can help designers and business people understand how their users’ behaviors could change and how strategically aligned that technology is to the product roadmap.
- Building the Piping: It also allows engineers to get a better sense of how the technology is built and how it can be integrated into current systems. This helps with the technical analysis pre-M&A as well as setting up integration infrastructure to hit the ground running post-M&A.
The M&A strategy for a corporation as large and influential as Facebook is obviously not as simple as the heuristic outlined here. Try-Before-You-Buy M&A mostly applies to consumer-facing applications in line with Facebook’s modular product strategy. Acquisitions of back-end products like analytics and advertising tools and acquisitions for talent follow their own patterns.
On a related note, companies like Microsoft and Zynga have gotten into a lot of trouble and received a lot of bad press for using this M&A tactic, but without actually executing an M&A. They used their might to blatantly rip off startups and force them out of existence. Fortunately, the volatility of the social space, prevents Facebook from committing such a deed — the failure of Facebook Poke comes to mind as an example.
So, for the good folks at Flipboard who have worked tirelessly to create a fantastic mobile reading experience: don’t let Facebook’s bullying get you down, it’s just their way of saying they like you…
