Internet Creates Value for Shareholders

The acquisition of WhatsApp by Facebook at the hefty price tag of $19 billion is only the latest major operation made by a top player in the Internet/ high-tech industry. It is a further sign of how this industry has come to play a dominant role in the current global economic scenario.

Fifteen years have passed since the boom of Internet firms on financial markets, when investors vied for dot-coms going public at stratospheric prices. The time has come to draw some conclusions. Looking at the stock performance of the main Internet companies from when they did their IPOs until the end of last year, the ability to create value for shareholders by the industry's main incumbents is apparent. Amazon's stock has skyrocketed by 23,900% (you read correctly) since it was listed on the stock exchange. Ebay and Yahoo! have seen growth higher than 6,000%, followed by Google and Linkedin with 1,200% and 500% stock price increases, respectively. Even in the case of Facebook, where post-IPO trends were initially negative causing an uproar, stock performance has been positive since the social media company went public: +27%.

But the real issue lies elsewhere. This growth in value was created as a consequence of strategic behavior and has led to further investment to sustain growth and financial performance. The industry's top players have used high-priced stocks as exchange tokens to purchase other tech companies on the market. The explicit objective is to consolidate corporate structures and further pushing on the accelerator of growth in the scale of operations. For example, Facebook, did 29 corporate acquisitions in 2010, Google has acquired 96 companies since 2003, meaning an average of 10 acquisitions per years for both firms. Taking the aggregate data for Amazon, Ebay, Google, Facebook, and Yahoo! combined, we obtain a total of 243 acquisitions since 1998, i.e. 48 acquisitions per company and 16 M&A operations in the industry on average each year, that is, more than an acquisition a month!

With respect to mature industries, where acquisition and merger processes are sought for the sake of external growth, by enlarging market share or increasing efficiency through productive synergies, web companies have different objectives. Most of the acquisitions in the industry are aimed at bringing externally produced innovation inside the company, as strategic factors to maintain the high levels of competitiveness that are typical of high-tech industries. Such competitive orientation is often referred to as innovation grafting. The strategic model of Internet companies is tied to the ability to innovate and constantly remain on the technological frontier. Therefore most of the acquisitions have targeted young and loss-making companies, which however were pursuing projects or selling products that were highly innovative and could be integrated in the established business models of the top players. Some of this operations received strong media attention, because targeted companies had already been well known, e.g. Facebook buying Instagram and WhatsApp, Google acquiring Youtube, and Yahoo! getting Flickr, while others fell under the radar because the targets were unknown startups.

There is also a difference in the payment of M&A transactions, with respect to traditional industries. Many Internet companies have paid their acquisitions mostly in stock, with cash taking the backseat. The cash & stock mode of payment typical of this industry mitigates the risk of overpayment. If the price paid to acquire the target subsequently revealed itself to be excessive, because economic and financial fundamentals are at odds with those implicit in the acquisition price, stock payment acts as an automatic stabilizer of the value transacted. In fact, the acquirer's stock price would go down and thus the effective value of the acquisition. If, conversely, the acquisition proved itself successful, thanks to the full implementation of the innovations bought on the financial market, the acquirer's stock price would climb and the ensuing stock rally would create further opportunities to use the stock card to make other acquisitions. The upward trend of these companies' stocks seems to have rewarded their strategy. Which app or website will fall prey of their appetites in the next mega-deal of the Internet industry?