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Comment by simon_ | Hacker News Reader

A decline in market value of more than $10B, implying that for the $2B FB spent, they will receive hugely negative value.

Seems extreme, although it was a bad day for tech stocks anyway, so the portion of the drop attributable to the acquisition is surely smaller.

Anyway, the market seems to be communicating that not only does it think FB got bad value, but that this deal is bayesian evidence that it is being badly managed.

EDIT: I still don't think 100% of the decline is attributable to the broader market move, because TWTR and certainly KING should be more volatile than FB. But, yeah, the story might not be as clear as I thought.

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Its $2B for the spend and $8B in information that Zuck might not know what he's doing.

Maybe investors are mad about their shares being diluted through these stock deals?

Rational investors don't sell shares punitively, although if they believe that they'll continue to be diluted at a rapid pace, that could account for some of the downward valuation.

The old saying is: the market can stay irrational longer than you can stay solvent.

It's not punitive, and is perfectly rational.

You buy some share in a company that you think will grow a lot; you discover that this company is not well managed, so it probably won't grow that much; you sell your stock, before the non-growth is realized.

Rather than mad, perhaps the investors are taking it as a signal that Facebook management, by buying other companies in mostly stock deals, believes that Facebook stock is overvalued.

That could be a rational rather than irrational explanation.

Bingo. The Oculus and WhatsApp deals have added up to billions "spent" via mostly stock instead of cash. This is almost certainly due to insistence from the Facebook execs themselves, who clearly are expecting the price of their stock to fall in the long term and are attempting to extract some value from it while the price is still high.

The real evidence for this will be if Facebook buys TimeWarner.

I didn't mean mad literally. I meant the intent that you mentioned.

There are only two ways to look at this and neither are good for the share price.

1.Z knows what he is doing and thinks the share price is overvalued.

2. Z has no idea what he doing. Who wants to own a company with incompetent management that can't be voted out by the shareholders.

I think you can attribute at least some of the decline to this. Only $400mm came from cash with additional shares possibly being issued based on performance. While this alone may not be a good reason for a long investor to drop shares, if it signals something about Zuckerberg's acquisition strategy going forward, then some investors may be expecting future dilution from new acquisitions. Furthermore, structure of share classes within FB also makes Zuckerberg's whims about this sort of strategy more influential to FB's direction than it would in another company.

I thought the article made a good point in that $2B wasn't perhaps what Occulus was worth, but how much it required in order to consider selling. FB had to pay a premium (perhaps because of its brand in the eyes of the owners of Occulus) in order to acquire the company, but it may be worth it to them anyways.

A premium? Figures I saw were 10M units at $300. That's 0.666x projected sales, when 2-3x is the norm for mature companies.

2-3x profit, right, not revenue? 10m units at $300 would not land anywhere near 3 billion in profits once you get to the bottom line. Lots of licensing fees coming up though.

No, revenue. For example Google's P/E (the equivalent profit ratio) is currently 31.4, and that's not including the control premium.

Comparing the cost multiple for a private company's acquisition to a P/E ratio of a public stock is way different and not really a fair comparison.

It's far from precise but I'd maintain it's useful to illustrate that if Oculus is a success, Facebook made a great buy.

Generally the starting point for any tech acquisition is 3x - 5x revenue multiplier. Occulus is hardware so their margins are lower than software, pushing them closer to the 3x mark.

Not sure what you're referring to, re: 10 million units. They haven't sold anywhere near that.

Currently their price to sales ratio is closer to 150. Facebook paid a massive premium no matter how you cut it. Even if they grow sales ten fold over the next three years, they'll still have paid a premium. I don't think the Oculus purchase can be justified in any near-term financial regard, it's a very long term bet.

"Oculus has said it will start selling a consumer product in 2014, and till now has shipped an impressive 60,000 units to developers at $350 each"

http://www.forbes.com/sites/parmyolson/2014/03/25/facebooks-...

I qualified it as 0.666x projected sales (intentionally not rounded >:), so yeah that 10M was a projected figure, which unfortunately I can't find the source for. By the end of 2015 I think Oculus will look like a steal, unless the goodwill is shot.

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