If you adopt a stilted view of valuation models (and DCF, in particular), it is possible that preemptive activities cannot be respected. However, I’d argue that standard discounted cash flow models provide plenty of versatility to value preemption in every of its forms. To illustrate, let me established up a straightforward example.
40 million to acquire it. I know that you are looking as of this example and arguing that it’s much too simplistic to be utilized to clarify Facebook’s acquisition of Whatsapp. While estimating the cash flows may become more complicated with Facebook, you are, in effect, making the same discussion.
The table, while looking at an array of outcomes, does provide some interesting insights into Facebook’s vulnerabilities. 19 billion. Remember that this number will never be the total value of Whatsapp since it does not are the direct income and cash flows that you will generate from Whatsapp’s business. You are welcome to try your hands on my spreadsheet that builds from the Facebook foundation case valuation to compute the effect on value of declining profits and falling margins. Although it is easy to create discounted cash flow valuations to justify functions of preemption, there are four conditions that have to be met for preemptive spending to be justified.
The risk is real, not imaginary: Spending preemptively to ward off a threat is practical only if the revenue reduction/ margin decline that is expected is real and it is not just in the fevered creativity of the top management. 10 billion to buy the whole company. The risk is unique rather than easily recreated: Spending money to remove a potential threat makes sense only if the threat is exclusive and not replicated easily/quickly. If the threat can be replicated easily, the spending company will see itself repeatedly spending bigger and larger amounts of its depleting stock to make following threats go away.
These are companies with fragile business models with shallow ditches rather than competitive moats separating them from mediocrity. The question on the Facebook/Whatsapp deal is whether these conditions are fulfilled. As I see it, the first condition is easily fulfilled since Facebook obviously has a very profitable (and high return) business to guard.
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19 billion is the least expensive means of avoiding that threat. It can be argued that he has earned their trust with the business’s performance over the last two years. It’s the fourth condition that needs to be most worrisome to Facebook investors. 19 billion for Whatsapp. For every company that comes out forward, in terms of value, with a preemptive strike, there are probably a dozen that end up worse off, often because they have obtained into three adages that people accept as conventional wisdom. You are that companies want to do whatever they need to do to survive, as if survival is the be all and end most of business.
The second is that doing there is nothing no option or that it’s always the most severe option. The third is that if you don’t act, your rivals shall and that their actions will hurt you more, if those actions are not sensible even. Survival is not the end game: As I’ve noted in my own prior posts, there is absolutely no glory in growth for the sake of growth or business survival with regard to survival. A business is a business enterprise and if you fail to generate sufficient returns, given the risk you face and the administrative center you have invested, you should shut the business down.