Aren’t you always asking yourself this question: “Is it worth it?”

Should I pay over ₪ 2,500 for a smartphone? Does a laptop really cost more than $1,000? What is the difference between a Bluetooth earpiece which costs ₪ 20 and one that cost ₪ 200? And is a messaging company who might have a large install base really worth $19B?!?

Where has the value gone in this rampant market? On the one hand, you can get more compute power in the palm of your hand per dollar than you could get 10 years ago from some of the more common enterprise servers. That smartphone for ₪ 2,500 has more functions, features and raw calculation throughput than the PCs in my home. But these are examples in the consumer space where the basic laws of competition and pricing seem to still exist. Lets look at some traditional technology acquisitions.

About 5 years ago Oracle Corporation, a software company, purchased Sun Microsystems Inc., a hardware/systems company, for $7.4B. Sun was selling $10B of products and services at the time, owned over 7,000 patents and employed over 30,000 people. This was a real bargain! In 2012, Cisco, a major network platform provider, purchased NDS, a supplier of media solutions to the pay TV market, for $5B. NDS employed around 5,000 people worldwide at that time and owned around 200 patents. And lets not forget the bloated merger of Hewlett-Packard and Compaq Computer Corp. in an overall $25B deal back in the market bubble of 2001.

Out in that Internet market, though, there seems to be a new set of economics that boggles the mind of the lay person. You could almost say that the internet “bubble” of mergers and acquisitions began with AOL‘s purchase of ICQ from Mirabilis in 1998 for $287M cash which was considered an absurd amount at the time. More recently, just this year the free mobile voice-over-internet company Viber was purchased for $900M by Japan’s Rakuten. There is a plethora of other examples of large cash and stock transfers that are used to gain functionality and/or market share. But Facebook seems to be setting another standard and the benchmark isn’t clear to me or other market watchers.

Almost 2 years ago Facebook laid out $1B for Instagram who had around 30M mobile users. The industry now measures these types of deals by “$ / user” (perhaps since there is no other way to describe such largess) and this deal paid over $30/user. Now Facebook has decided that 450M Whatsapp users has a valuation of over $40/user! In comparison, Rakuten figured that Viber’s users were worth $5 a piece – something to think about.

Does it feel like Facebook will do anything to contain its losing market share in the mobile arena? All other explanations lack any common sense when you consider that the majority of Whatsapp users were probably already Facebook users and they were abandoning the FB platform for the 2 applications that FB now owns. And don’t you wonder how the negotiations were handled between Facebook (the behemoth of social networking generating over $2B in revenue with over 3,500 employees) and Whatsapp (with 50 odd employees and $0 revenue). As most negotiations are an exercise in bargaining, Jan Koum, CEO of Whatsapp, must have started with a position of more than $19B for that to have been the eventual outcome. Wouldn’t Whatsapp and their single investor Sequoia Capital have readily accepted a $1B purchase price at a return of about 16/1 on their investment? But Facebook forced them into a corner to accept a return of 300/1 instead. And wait for the late breaking news: Whatsapp is going to add voice (refer to the Viber valuation once more).

I didn’t immediately post this article since I was waiting to hear the “magic behind the deal” (would that have been voice over the internet?) that would have turned this into something nonsensical. Unfortunately, that has yet to appear.

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