Facebook's Acquisition of Whatsapp: The Rise of Intangibles (a)

Abstract

One of Susan Shaw's interests is investing in the stock market. She has copied some pages of Facebook Inc.'s 2015, 2014, and 2013 financial statements, and the company sure seemed like an investment winner. But as she peruses these financial statements, she notices that in the 2014 financial statements there are some huge differences from the 2013 statement for a number of line items, such as Total Assets, Goodwill, Additional Paid in Capital, Revenue, Net Income, and Net Cash Used in Investing Activities. The reported dollar amounts for many of these items listed on the 2014 balance sheet, income statement, and statement of cash flows, had more than doubled and she wonders if traditional financial statements and reporting conventions were robust and effective in communicating the intricacies and details of deals such as Facebook's acquisition of WhatsApp and were all Facebook's assets and enterprise value reflected in its balance sheets. Excerpt UVA-C-2382 Rev. Mar. 31, 2017 Facebook's Acquisition of WhatsApp: The Rise of Intangibles (A) Susan Shaw had a number of diverse interests. In addition to a rising legal career, she loved whitewater rafting, gourmet cooking with friends, Broadway musicals, volunteering at the local homeless shelter, and investing in the stock market. It was the investing pursuit that occupied her attention this cold and rainy Saturday morning. On her desk, she had several pages of Facebook Inc.'s 2015, 2014, and 2013 financial statements that she had had the foresight to print out earlier in the week at the office. She was intrigued with the idea of investing in a company that sure seemed like an investment winner. As she perused the financial statements, her normal starting point for learning more about the performance of a company, the first thing she noticed was that in the 2014 financial statements there were some huge differences from the 2013 statement for a number of line items, including Total Assets, Goodwill, Additional Paid in Capital, Revenue, Net Income, and Net Cash Used in Investing Activities (see Exhibit 1). The reported dollar amounts for many of these items, sprinkled across the 2014 balance sheet, income statement, and statement of cash flows, had more than doubled. “I wonder what's up,” she mused. “I guess I'll need to delve into the details to find out. It sure seems unusual that a company could double in size in just one year—there must have been a merger of some sort.” Indeed, a simple Google search of “Facebook and 2014 mergers” turned up a number of hits. Eight of the first ten search listings referred to the company, WhatsApp Inc. Her interest was piqued, so she poured another cup of coffee and began her methodical review. Facebook, Inc. . . .