Financial Analysis: Facebook's WhatsApp Acquisition and Its Impact

This report provides a comprehensive analysis of Facebook's acquisition of WhatsApp in 2014. It begins with an introduction outlining the report's purpose, which is to understand Mark Zuckerberg's motives and the justification of the acquisition price. The report analyzes the cash flow statements, highlighting changes in operating, investing, and financing activities before and after the acquisition. It further delves into the impact on various financial ratios, including current, quick, debt-to-equity, debt, price-earnings, and earnings per share ratios, evaluating the short-term and long-term solvency of the company. The report explores Facebook's motive behind the acquisition, emphasizing the desire to connect people and expand core internet services. It also discusses the integration challenges and the risks associated with such a significant acquisition, like the integration process, substantial investments and financial conditions. The report concludes by summarizing the key findings and implications of the acquisition on Facebook's financial performance.

MANAGEMENT ACCOUNTING

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Contents
Introduction...........................................................................................................................................2
Analysis of cash flow statement............................................................................................................2
Analysis and evaluation of short-term and long-term solvency of the company through ratio analysis.4
Motive and mission...............................................................................................................................8
Integration.............................................................................................................................................9
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11

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Introduction
The purpose of the report was to analyse the acquisition of WhatsApp by Facebook in 2014.
The aim of the report is to understand the motive of the Mark Zuckerberg that how the price
system of the acquisition process is justified. Along with it, the report also discloses the
analysis of cash flow statements especially of the time when acquisition took place. Cash
flow statement has several changes in the items of the operating activities, financing
activities, and investing activities. In investing activity, the company has discovered that how
much amount they have invested in purchasing the assets while acquisition (Lebedev, Peng,
Xie, and Stevens, 2015). Financing activities discovered that how much owner`s fund and
debt have been either exchanges or raised during acquisition. The impact further was not
limited to cash flow but especially it has also affected the ratios such as leverage ratios,
solvency ratios, price earning ratio and Earning per share ratio. Undoubtedly, the acquisition
has affected the debt, equity, and earning after acquiring the WhatsApp. The same change is
depicted and evaluated in this report (Abbas, Hunjra, Saeed, and Ijaz, 2014). The report
elaborates how external auditors play an important role in influencing the mindset of the
investors and shareholders.
Analysis of cash flow statement
When the flow of cash is analysed, it is seen that as compared to 2015, the expenses on
research and development activities was increased to around $2.15 billion or 81 percent as
when compared to 2014. The change was seen due to increase in the share-based
compensation expense of around $1.02 billion when compared to 2014, but the effect of
share-based compensation was related to acquisition process in the second half of 2014.
Moreover, other payroll expenses was also increased and shown a growth of around 43
percent for engineering and technical functions that affect the P&L statement of the company

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and also the cash flow statement. Apart from this, the company planned to engage more
software engineers and further technical employees to enhance the investment and funded the
research and development initiatives. There has been a great impact on cash generated from
operating activities due to amortisation of several intangible assets with an amount of nearly
$305 million (Facebook, 2014).
After looking at the cash flow statements of Facebook after and before the acquisition, it is
seen that the net income has shown a increase with just 3 months after acquisition which was
increased from USD 2940 million to USD 3688 million. The stock-based compensation has
already been discussed in previous paragraph but it has also shown a hike and increase in
amount number of compensation from USD 1786 million to USD 2960 million. The working
capital changes in the operating activities has also increased from USD 4222 million to USD
5457 million (Facebook, 2016). Although, the changes in the working capital amount does
not have much influence on the process of acquisition. Moreover, the acquisition process has
affected the amount in investing activities such as capital expenditure increased from USD
1362 million to USD 1831 million. The amount of new acquisition, disposals, and asset sales
had a sudden rise to USD 4975 million from USD 368 million. The company had purchased
USD 883 million in 2013 and after a year, net sales of investments was around USD 1241
million. Moreover, other investing cash flows that is used in the operation was USD 11
million in 2013 and it increased to USD 348 million. The cash used in investing activities
increased from USD 2624 million to USD 5913 million (Facebook, 2015).
After analysing the two activities that can lead to inflow and outflow of cash change in
operating and investing activities, considering financing activities is important. The company
sold common stock issuance; it generated an amount of around USD 615 million in 2013. By
the time of acquisition, the company repurchased or issued common stock in cash by issuing
more from the year of 2013 but in 2014, the company invested the money in purchasing the

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common stock of around USD 670 million that result in cash used in and further more USD
20 million was used to purchase the common stock. The long-term debt issuance or
retirement flowed an amount USD 1500 million to allow the issue deals and by the time it
retired the whole time to get it or raise it from debt issuance. Other cash flows from the other
financing activities, the company have financed itself by USD 1626 million which is much
higher to the previous year with USD 218 million. The drastic amount changes in the cash
flow statement is related to acquisition of whatsApp (Facebook, 2017).
Analysis and evaluation of short-term and long-term solvency of the company through ratio
analysis
Current Ratio
2017
($m)
2016 ($m) 2015 ($m) 2014 ($m) 2013 ($m)
Current assets (A) 47543 34401 21652 13670 13070
Current liabilities
(B)
10117 2875 1925 1424 1100
Current ratio (A/B) 4.7 11.97 11.25 9.5 11.88
As per the data, until 2013, the company maintained an adequate amount of current assets,
which are highly liquid, the ration was above the ideal ratio, which means the company has
good sum of current assets to pay its liabilities. Therefore, in 2014, the company overtook
whatsApp after October and it influenced the current ratio because when the companies came
together, Facebook has to involve WhatsApp`s current assets and liabilities. The current ratio
remained consistent during 2013 to 2016 but in 2017, the ratio changed drastically but still it

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is good to look on as the purpose of liquidity of assets to comply with the current liabilities
(Bloomfield et al., 2015).
Quick ratio 2017(m) 2016(m) 2015(m) 2014(m) 2013(m)
Quick
assets(A)
47543.0 33442.0 20993 12877 12558
Current
Liabilities(B)
10,117.0 2,875.0 1925 1424 1100
QR(A/B) 4.70 11.63 10.90545455 9.04283707
9
11.41636
The companies usually consider and value its quick assets to have a deep analysis of its
liquidity statement. The ideal ratio lies at 1:1. To determine the position of an organisation to
view its liquidity, analysing quick ratio is an appropriate way. As quick assets and current
liabilities, do not have much consideration during the process of acquisition. Therefore, the
ratio changes when the company merges the quick assets and the current liabilities of
WhatsApp. Moreover, the liquidity of the company remained feasible in all four years and in
2017, it changed a lot but still the liquidity remained appropriate in 2017 (Shamlo, Mullen,
Kothe, Su, and Robbins, 2015).
Solvency ratio
Debt to
equity(gearing
)
2017(m) 2016 (m) 2015(m) 2014(m) 2013(m)
Total
Liabilities (A)
10177.0 5767.0 5,189 3,870 2,388

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Shareholder’s
Equity (B)
1,235.0 59,194.0 44218 36096 15,470
D/E(A/B) 8.24 0.10 0.1173504 0.107214096 0.154363
Analysing and considering this ratio remained an important concern while knowing the effect
of acquisition on the company. The gearing ratio generally relies on the concept of financial
leverage and analysing the investment. Here total liabilities consist of short-term+ long-
term+ total payment. It is depicted that higher the ratio, the company may not have the ability
to generate cash to pay back the debt obligation whereas, a lower ratio depicts that the
company might not be using and taking advantage of the hiked or increased profit which a
financial leverage may bring. Moreover, at last lower ratio reflects the ability of the company
to pay the debt (Olsson, Dahlin, Fiandaca, and Auken, 2015).
Debt Ratio 2017(m) 2016(m) 2015(m) 2014(m) 2013(m)
Total
Liabilities(A
)
10177.0 5767.0 5189 3870 2,388
Total
Assets(B)
2,201.0 64,961 49,407 39,966 17,858
DR(A/B) 4.62 0.09 0.105025604 0.096832307 0.133722
Although considering this ration depends on the context. When it is analysed on the basis of
pure risk, lower ratios are generally better especially when they are below 0.4. Therefore, the
above table reveals that in the year of 2014 and 2016, the ratio is better. Moreover, in the year
2017, 2015 and 2013, the ratio is more than 0.4 (Doyle, 2015).

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Market based ratios
Price
earnings
ratio
2017(m) 2016(m) 2015(m) 2014(m) 2013(m)
Market
price(A)
130.3 133.5 110.65 82.17 58.58
EPS (in
cents) (B)
2.81 7.0 2.58 2.2 1.2
P/E(A/B) 46.38 19.13 42.8875969 37.35 48.81667
A high proportion of ratio indicates that investor expect a higher earning. Although, it is not
very necessary that a high P/E ratio is always better than the lower P/E ratio because a high
P/E ratio can reflect that stock is overvalued. P/E ratio looks good when it have 20-25 times
more earning. From the above calculated table, it can be said that shareholders expect a good
sum of return from the company as the return remains consistent especially in the year 2015,
2014, and 2013. When the company acquired in 2014, the return suddenly decreased as the
company required finance for its further operations, so it might have retained its earnings
rather than distributing (Haskins, 2017).
Earnings per
share
2017(m) 2016(m) 2015(m) 2014(m) 2013(m)
Net income
(A)
15934.0 10217.0 3688 2,940 1,500
Number of
share
2,904 2,904 2,853 2,664 2,517

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outstanding(B)
EPS(A/B) 5.49 3.5 1.292674378 1.103 0.595948
From the calculated table, it can be said that the company does not earn a good sum in 2013
because it can be seen that net income is almost half times of the number of shares
outstanding. Whereas, in 2014, the EPS ratio showed a good increase in the year 2016 and
2017. The company kept improving its EPS ration as the time passed from 2013 to 2017
(Schmidt, 2015).
Motive and mission
Facebook has already reached and announced on 19 February 2014 to reach a definite
agreement to overtake whatsApp, the increasingly growing company provides cross-platform
mobile messaging company. The company agreed that it would acquire it for the total of $16
billion that includes $4 billion in cash and $12 billion worth of Facebook shares. Moreover,
the agreement provides an additional $3 billion for the restricted stock units, which was
granted to WhatsApp founders, and employees that will almost vest for more than four years.
WhatsApp has emerged leading and growing real time mobile services with more than 450
million people who use services each month (Facebook, 2015).
The acquisition supports the motive of both Facebook and WhatsApp to bring more
connectivity among the people by delivering and enhancing more core internet services.
Moreover, as far as the motive lies on the part of Facebook, it strived to enter into a business
strategy that made and intended to continue to process of acquisition to add specialised and
abled employees and other complementary companies, products, services, and technology.
Initially the company was not very confident while acquiring because it though that
acquisition can harm the financial condition and results of operations and affect adversely the

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price of the common and regular stock (Haskins, 2017). It also doubted that it need to pay
substantial amounts in cash and may incur debt to pay for process of acquisition. There were
several risks associated with the acquisition that the company has already estimated such as
indebtedness that could result in fixed obligation of interest payment, increased interest
expense, and involve covenants and other restrictions which could hinder the ability of the
manage the operations (Facebook, 2016).
Integration
The integration procedure of proper time and resources and the company may not manage the
operations properly. Facebook has said that the ability to integrate the complex acquisition is
not proved yet. For example- Facebook had admitted that acquisition of Oculus and
WhatsApp is more complex than other companies that have historically acquired. Oculus
assisted Facebook to build technology and different products, which are new to Facebook
(Albergotti, Macmillan, and Rusli, 2014). The company has substantial investments of
various resources to support the acquisition that have resulted into important ongoing
operating expenses. The time when the process of acquisition, it realised that we cannot
assure that these investments may or may not be successful. It interpreted that if it fail to
integrate the companies, it may not realise the expected benefits of the transaction and this
way the business transactions is hampered (Facebook Investors Relation, 2018).
WhatsApp is until now is the largest acquisition. Facebook bought whatsApp because it
experienced users’ growth. More than 500 million people use WhatsApp services and adds 1
million users per day. WhatsApp has provided fuel to Facebook growth in the developing
market where internet connectivity is scarce but whatsApp is used widely. Facebook will get
access to various mobile users. The mobile using base of Facebook has been increased after
collaborating with WhatsApp. The application of Facebook when launched in 2008 has 450
million active users and gain 250 million in last nine months. The acquisition helped to

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benefit social network in three most important ways such as it enhanced the positioning of
benefits of using the social media among the teenagers and youth people. The most important
group of users that have grown disinterested in using Facebook but after acquisition, it
evolved mobile messaging that is one of the hottest growing markets which social network
could not do to penetrate and acquisition with WhatsApp gave Facebook, an opportunity to
grow. The acquisition propelled Facebook at the top of mobile messaging. Moreover, another
photo messaging applications such as snapchat rejected two offers from Facebook. Apart
from this, Zuckerberg looks another opportunity to access and diversify the usage of social
network. He acknowledged WhatsApp`s strength in the emerging markets and mature
markets. The company wants to give best tools to share with several different sized groups to
develop various mobile experiences beyond messenger facilities and Instagram. This is how
it sees a lot of new growth and opportunities to serve the whole community.
The investors are always interested in their profit, especially when they are long-term
investors for any organisation. They expect long-term earnings and a sustained goodwill of
the company. Although, goodwill is rarely analysed of technology firms. Whereas, it relies on
several other factors such as revenue growth and profit potential in the market. Goodwill is
seen as irrelevant when the valuation of company such as Facebook that has few assets as
when purchased WhatsApp $21.8 billion in cash and stock in 2014. It accounted for $15.3
billion for goodwill while acquiring WhatsApp, which is extremely high even when
WhatsApp lacked a proven and efficient business model. The company accepted that
Facebook fully monetised WhatsApp 1.2 billion active users on monthly basis, then it will
overpay for WhatsApp and also generate a massive amount of goodwill in their balance
sheet. Zuckerberg said that goodwill could represent an immense financial up gradation.
The company may be exposed to inventory risks especially with respect to our Oculus
products, which result in rapid changes in respect to product cycles, pricing, defective

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merchandise, consumer tastes related to Oculus products. Facebook endeavoured to predict
accurately the trends and avoid overstocking and understocking products that Oculus may
sell. After acquisition, the company demand for products that can change the time between
inventory and the components ordered and also the date of sale (PurtillJune, 2018). After a
certain time, the company started selling and manufacturing the new product of Oculus, it is
difficult to establish the vendor relationships and determine the appropriate product or
different component selection. The acquisition of certain different types of inventory
components that require significant lead-time and prepaid which are not returnable in future
(Facebook Investors Relation, 2018).
Apart from knowing the share price of the company is not sufficient. The investors require
further additional information and investigation of operation of the company (CFA institute,
2018). Independent audit report, which the annual report has, helps the company to know the
perception of external auditors regarding what accounting policies and methods do company
uses to fairly represent the financial statements. As an external auditor, he knows what GAAS
(Generally Accepted Auditing Standards), has company used regarding impairment of assets.
The auditor`s report gives an true reflection on what position the company in the market in
regards to goodwill (Cleartax, 2018). Even it is necessary to have such system in the
organisation where the management should not be in any position to affect the external
auditor (Doxey, 2013). The effect on investors and shareholders of an specific audit report
that is in the annual report is disclosed under the regulation because it has information of
potential effects of audit disclosures that states what is the audit quality (Cleartax, 2018).
Integrating the intellectual property derived from acquisition in business that generally
involve various intercompany transactions which have affected the increasing the provisions
of income taxes. Moreover, the provisions for income taxes and effective tax rate may lead to
increase in the following acquisition and integration. The effect of magnitude depends on the

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type, size, and taxing jurisdiction of certain intellectual property and also the contribution to
income in different periods. When Facebook announced the plans to acquire WhatsApp in
Feb 2014 (Fouad, 2017). The founders of WhatsApp attached a purchase price in both money
as well as shares. CEO Zuckerberg led to well worth learning among the employees related to
leadership lessons. He tried to move fast to avoid irrelevancy and also Facebook is not at all
immune to the changing market trends (Leangapichart, Gautret, Brouqui, Mimish, Raoult,
and Rolain, 2016).
Conclusion
From the above report, the conclusion can follow a particular path; the path can be evaluation
of financial statements and analysing each ratio, which reflects the impact of acquisition. The
impact on cash flow statements is greater as compared to other sources that are used to
evaluate the acquisition such as financing activities have reflected the issue of shares and
other conversions such as share compensation agreements. Moreover, the company used the
money to purchase the tangible and intangible assets of WhatsApp. The report represents the
integration, process, and motive of acquisition of WhatsApp. Undoubtedly, a meeting
between the Board of Directors of both the companies is important. It can be said that the
company have managed its current scenario of business operations very well. The report has
also discussed that how strongly external auditor`s report affects the investor`s perception.
The report has described the motive of the Facebook that what benefit it would get if
acquisition.

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