1

A bit late in the game. But was curious on how this deal works out.

Facebook bought WhatsApp for $19 billion. This involved $4 billion in cash, $12 billion in stock and $3 billion in restricted stock.

The general question is: how does $15 billion in stock dilute ownership of existing shareholders?

Lets say the general public owns x%, Mark Zuckerberg owns y% and sundry others own the rest. How is the $15 billion split across various stakeholders? This question sort of implies that existing shareholders somehow gave up their shares. Even if assuming FB allocated new shares (from the Treasury stock?) isn't it still a dilution of existing shareholder stock value?

4

It's a dilution of the ownership; the public used to own x% of Facebook and now they own less than x% of the bigger Facebook that incorporates Whatsapp (assuming that Whatsapp was completely private before).

Logically, the $15 billion is allocated proportionately between the existing stockholders (x% of it for the general public, y% for Mark Zuckerberg, etc). However it doesn't really make sense to think of it that way unless Whatsapp is actually worthless.

What's important are the proportions. Suppose that the newly issued shares correspond to 25% of the previous share capital. Then previously the general public owned x% out of 100%, and now they own x% out of 125%, i.e. (0.8x)% of the new share capital.

Whether the actual value of those stocks has changed depends entirely on the actual value that Whatsapp adds to the old Facebook. As Dheer says, only time will tell on that one.

Apart from the financial consequences, dilution is sometimes considered important because it can mean a change in influence: a significant shareholder would often be able to encourage the company to act in a certain way. With a lower percentage ownership, that influence is diminished.

3

The answer to your question has to do with the an explanation of "shares authorized, issued and outstanding." Companies, in their Articles of Incorporation, specify a maximum number of shares they are authorized to issue.

For example purposes let's assume Facebook is authorized to issue 100 shares.

Let's pretend they have actually issued 75 shares, but only 50 are outstanding (aka Float, i.e. freely trading stock in the market) and stock options total 25 shares.

So if someone owns 1 share, what percentage of Facebook do they own? You might think 1/100, or 1%; you might think 1/75, or 1.3%; or you might think 1/50, or 2%. 2% is the answer, but only on a NON-diluted basis.

So today someone who owns 1 share owns 2% of Facebook. Tomorrow Facebook announces they just issued 15 shares to Whatsapp to buy the company. Now there are 65 shares outstanding and 90 issued. Now someone who owns 1 share of Facebook own only 1/65, or 1.5% (down from 2%)!

ANSWER

  1. The answer to your question is it depends. If Whatsapp GROWS Facebook's business valuaiton in excess of the percent stock dilution existing shareholders experienced at the time of purchase (25% in our example), shareholders weren't actually "diluted" because their 1.5% is in aggregate more valuable then their previous 2% (would you rather own 1.5% of 1 billion or 2% of 1 thousand...)
  2. Should Facebook's valuation remain the same, in our example, shareholder's were diluted 25%
  3. Should Facebook's valuation decline shareholder's would be diluted in excess of 25%

P.S. "Valuation" can be thought of as the price of the stock at the time of the purchase announcement.

  • It doesn't depend. The stocks ARE diluted. The value may grow and recover or outgrown the current Facebook value - but that's not what the question was about. – littleadv Aug 9 '14 at 4:38
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isn't it still a dilution of existing share holder stock value ?

Whether this is dilution or benefit, only time will tell. The Existing value of Facebook is P, the anticipated value after Watsapp is P+Q ... it may go up or go down depending on whether it turns out to be the right decision. Plus if Facebook hadn't bought Watsapp and someone else may have bought and Facebook itself would have got diluted, just like Google Shadowed Microsoft and Facebook shadowed Google ...

There are regulations in place to ensure that there is no diversion of funds and shady deals where only the management profits and others are at loss.

Edit to littleadv's comments:
If a company A is owned by 10 people for $ 10 with total value $100, each has 10% of the share in the said company. Now if a Company B is acquired again 10 ea with total value 100. In percentage terms everyone now owns 5% of the new combined company C. He still owns $10 worth.

Just after this acquisition or some time later ...

  1. Assume both are running independently, Company B actually grows in value to 200 and company A remains same at 100 ... then shareholders of company A have gained value and that of company B have lost.
  2. Viceversa B remain at 100 and A grows to 200, then you have lost value and shareholder of B have gained
  3. In practise it is very difficult to say as both entities would be merged and typically run as single unit and are mutually beneficial to each other. Exactly how much is difficult to say.
  • Dilution is not of value, it is of stocks. Arguably, the value of the diluted stocks after the purchase will remain the same as it was before the dilution prior the purchase. – littleadv Aug 8 '14 at 16:06
  • @littleadv Agreed. – Dheer Aug 9 '14 at 3:49
0

Of course it is a dilution of existing shareholders. When you buy milk in the supermarket - don't you feel your wallet diluted a little? You give some $$$ you get milk in return. You give some shares, you get Watsapp in return.

That's why such purchases must go through certain process of approval - board of directors (shareholders' representatives) must approve it, and in some cases (don't know if in this particular) - the whole body of the shareholders vote on the deal.

  • Regulators may also be worth noting in big deals like this. – JB King Aug 8 '14 at 8:43
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    Dilution is a specific term reflecting the idea that your ownership percentage of the company (i.e. facebook) has reduced. It wouldn't have happened with an all cash purchase, so the milk purchase analogy is flawed. – Ganesh Sittampalam Aug 8 '14 at 19:04

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