Meta Platforms had no plan to monetize WhatsApp for years following its $19 billion acquisition of the company in 2014, didn't present its board of directors with a standard valuation method for the company, and lost at least a billion dollars annually after acquiring the company until 2020, a US Federal Trade Commission expert said today.
Meta Platforms had no plan to monetize WhatsApp for years following its $19 billion acquisition of the company in 2014, didn't present its board of directors with a standard valuation method for the company, and lost at least a billion dollars annually after acquiring the company until 2020, a US Federal Trade Commission expert said today.Meta has been “highly profitable as an enterprise since its inception,” earning roughly four times its internal cost of capital from 2004 to 2022, according to an analysis of the tech giant’s finances presented in US District Court for the District of Columbia by FTC expert Kevin Hearle.
A comparison between Meta’s cost of capital and the minimum rate of return needed to satisfy investors was used by Hearle as a “competitive benchmark” to assess the company’s profitability as the tech giant faces a potential break-up in high-profile antitrust litigation over its alleged monopoly over personal social networking (see here).
Meta’s average annual rate of return was between 36.4 percent and 41.4 percent per year from 2004 to 2022, according to one analysis of Meta’s finances by Hearle.
Hearle presented a chart showing two lines that compared Meta’s profitability to a “competitive benchmark” where a firm earns a 10 percent rate of return compared to its average, after-tax cost of capital from sources including stocks, bonds and other forms of debt.
Meta’s profitability was roughly equivalent to an investment of $100 generating $209 over a seven-year lifetime. The competitive benchmark Hearle used, by contrast, showed a $100 investment yielding $144.
Hearle had not “unpacked” why Meta’s rate of return has been “so large” compared to its cost of capital historically, Hearle testified during cross examination.
Following the FTC expert’s hour-long direct examination, US District Judge James Boasberg him whether the thrust of his analysis was that Meta made a “terrible deal,” in part, because their estimates about the average value of individual WhatsApp users “aren’t even in the ballpark.”
“It didn’t make sense economically, it was to squash competition, that’s the ultimate point of the analysis, right?” Boasberg asked.
Hearle responded that he was not opining on whether his estimated “transaction premium” of nearly 11 billion, or 135 percent of WhatsApps’s value, was “bad or good.”
After a couple more questions from Boasberg about Meta’s allegedly “vast overpay,” FTC attorney Noel Miller told the judge that additional experts will later provide testimony addressing his line of questioning.
— Valuation —
A presentation made to Meta’s Board of Directors days before the company acquired WhatsApp justifying the $19 billion purchase did “not reflect a standard valuation method,” according to Hearle.
Those standard methods include assessing discounted cash flow, the so-called “market approach” and the “asset, or cost approach,” according to Hearle.
The pre-acquisition valuation relied on most by Hearle, he said, was one provided for Meta by KPMG pegging the messaging app’s worth at approximately $8.1 billion.
That valuation “explicitly estimated the value of WhatsApp as a stand-alone enterprise, exactly the type of value estimate I was looking for,” Hearle said.
Hearle has worked in-house at the FTC since 2019, assisting the agency with merger review by analyzing the financial terms and efficiency claims for at least a dozen deals, he said.
The FTC introduced an almost entirely sealed document outlining WhatsApp’s post-acquisition average revenue per user, or ARPU.
In Meta's 2014 board presentation just prior to the acquisition, which referred to WhatsApp by its then-internal name “Cobalt,” the company’s current monetization strategy was yielding only $0.10 per user (see here).
Google’s ARPU, by contrast, was $30 dollars, Hearle later testified.
“In 2024 … assuming Cobalt is worth 12x revenue and has 2 billion users, it would need to have $2.05 in ARPU, which today is less than Line’s ARPU and when adjusted for inflation is $1.53,” the slide deck said.
Hearle’s own independent assessment of WhatsApp’s ARPU, based on his access to WhatsApp's data on actual user counts, revenues and financial statements from just after the deal closed, pegged the app’s 2013 revenue per user at 3.6 cents.
One of the risks outlined in the board presentation, according to Hearle, is that the company had no plans to monetize WhatsApp “for years.”
Ian Smith, an investment banker hired by Meta to advise the company on the transaction, said Meta’s valuation framework “made sense to me,” according to deposition testimony introduced by Meta during Hearle’s cross examination.
Hearle faced questioning from Meta counsel about when non-standard valuation methods may be appropriate and various hypotheticals that would justify the deal’s $19 billion price tag.
One of the company's criticisms of Hearle's analysis was that he only analyzed WhatsApp's ARPU until 2022, despite the valuation framework presented to the board saying it was based on a 10-year timeline through 2024.
Hearle acknowledged that he did not have access to data after 2022.
Boasberg asked Hearle about trial testimony from Meta Chief Executive Mark Zuckerberg during the first week of trial, where the tech mogul predicted that the world is “very rapidly moving to a world where every small business on our platform” will have an AI agent in their messaging platforms that could do sales and customer support.
People using messaging apps like WhatsApp to interact with businesses is much less frequent in the US compared to other parts of the world, Zuckerberg said, “because the cost of labor is high.”
Being able to opt for AI-powered customer service intermediaries on WhatsApp instead of paying humans to respond to chat messages will be “the inflection point where it makes sense for businesses,” Zuckerberg said. “That will add a lot of value for consumers and end up being a very profitable business.”
Assuming Meta’s position that WhatsApp’s “real value” is “around the corner,” how should such a “very long play” be taken into account, Boasberg asked Hearle.
“That’s not a question I analyzed,” Hearle responded.
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