App-arently, it’s got 450 million users, paying a dollar a year each (max: since first year’s free, a fair proportion won’t be paying anything, but let that pass.)
And it takes no advertising, so as of now this is its only method of income generation. In good old Yorkshire parlance, it’s the “Many a mickle makes a muckle” business model.
Fair play: for a product that can’t have cost more than about three and sixpence to develop – alright a few thousand – $450million annual income is pretty damned good.
I haven’t seen their report and accounts, but I’m guessing that unless management have been employing thousands of people to do not very much and pissing it up the wall on an epic scale, the profits aren’t a lot less than the income.
How many people do you need to run an App, once it’s set up and fully operational? Answers on the back of a postcard, but if it’s more than a dozen, I’d like to see their job descriptions, roles & responsibilities, and monthly/quarterly objectives. (Having just checked online, I discover it’s around 50, so even if they’re all on $100K a year, total costs can’t be much more than $10million.)
No doubt the founders (I think there are two of them) are already wealthy beyond imagining. Good for them. I’m not a bit jealous. Really. Well, perhaps just a bit.
But seriously, FaceBook are paying how much for this business? $19 BILLION?
I mean, I know that the Initial Public Offering raised zillions (alright $104 billion), and I guess it’s burning a hole in their corporate pockets, with investors and advisers all enquiring what they’re going to do with it to make even more money, and hoping to rake off a fair whack themselves in the process.
But come on: $19 BILLION? Even if a fair proportion of it is in FaceBook stock (which can go down as well as up – though I notice it’s currently nearly double it’s launch price of £38, after an early wobble). For a business turning over $400 and, let’s say ever so conservatively, making a profit of half that: even at ten times earnings (the received wisdom in M&A circles for ordinary human beings is 5 times if you’re lucky), then $2 billion at a push.
Maybe FaceBook thinks it can double or treble its user base and subscriber numbers – always assuming its ever-so-young target market doesn’t actually move on to the next big thing and leave it all behind. (Remember Friends Reunited? Who?) So even at those excessive figures and 30 times earnings – now we really are in la-la land – it’s hard to see beyond $6billion.
Every study I’ve seen of the M&A market suggests that between a half and three-quarters of all acquisitions fail to enhance shareholder value, mainly because deals are done opportunistically, driven by large corporate and personal egos, rather than strategically, with a clear post-acquisition integration plan.
Similar recent blockbuster take-overs make the point all too graphically. Hewlett Packard paid $11.1billion for Autonomy – a valuation revised down barely 13 months later by £8.8billion. Everyone knew it was a cultural mis-match but there was too much money riding on it for all the hangers-on, for anyone to tell the truth at the time. And did anyone lose their job over this near £9billion write-down?
Who will carry the can at FaceBook if (or should that be when) this acquisition suffers a similar fate? Anyone? At all?
And I bet none of the advisers offered any word of caution, like, “Where are the income streams actually coming from to pay back the investment?”
Whether you want to grow by acquisition, or just organically, the application of commercial logic and reality to your business plans is not an optional extra. Unless you have £100 billion kicking around in your bank account, this sort of vanity project is strictly for the birds.
David Croydon: 01844 238692 or e-mail dave@hilltopconsultancy.co.uk