Fair notice: this essay has a trick title.
Mark Zuckerberg, Facebook’s Co-Founder, Chairman, and CEO, recently spent up to $19 billion to buy WhatsApp. You might have heard.
Whether Mr. Zuckerberg overpaid is a subject of frenzied speculation for those who must have an opinion. We do know that no one else thought it was worth more; rather, that no one else with a spare $19 billion thought it was worth more. We know that because Mr. Zuckerberg was 1) willing to pay 2) more than anyone else. Otherwise the media would be all aflutter about what someone else was uniquely willing to pay.
Of course no one knows what WhatsApp is worth. To know what it’s worth implies full knowledge of the future, including a host of related matters such as the skill Mr. Zuckerberg and his team will bring to bear, how much it’s worth to Facebook to prevent someone else from acquiring WhatsApp, what Mr. Zuckerberg could have hit had he aimed his $19 billion elsewhere, and much more. (In other words, otherwise.) Google, another potential acquirer, had its own calculus.
Let’s be clear about what has happened. What has happened is that Mr. Zuckerberg has placed a bet. He has bet that he and Facebook will be better off with WhatsApp and without $19 billion (scenario 1) than without WhatsApp and with $19 billion (scenario 2).
If the actual, true, objective value of WhatsApp to Facebook were known, it wouldn’t be a bet. If the value were known no one would speculate about Mr. Zuckerberg’s wisdom. They’d merely check his arithmetic.
Facebook paid many millions to its advisors, so presumably a great deal of due diligence got done before money changed hands. It’s not likely that there was a slip in a spreadsheet, and Mr. Zuckerberg himself is clearly an intelligent man. And yet some say he overpaid while others say he got a bargain. He himself says (no great surprise) it’s a bargain.
There are a great many issues to consider when we assess whether an acquisition succeeded. Most of them are squishy; in fact, much more squishy than analysts would have us believe. I named a few of them (squishy issues, not analysts) four paragraphs ago. But we won’t get into those issues here. They have nothing to do with the essay’s trick title.
Instead, let’s just say that some percentage of acquisitions make people happy and some don’t. Let’s just say, generously, that the percentage is 60%. So, when the pundits judge Mr. Zuckerberg’s deal a year or two from now, Mr. Zuckerberg will have a 60% chance of being coronated. (It’d be different if, for example, Warren Buffett had made the deal. He’s got a track record that’d let us and Thomas Bayes set personalized expectations for him.) With 60% odds it’s no great feat to get it right and it’s no great shame to get it wrong.
But how can we tell if he got it right or wrong? Much will happen in Facebook’s world over the next couple of years that can affect the outcome of the WhatsApp purchase, and much of that will be outside Facebook’s control. If, for example, we judge the classic way — by market value pre- and post-acquisition — those “external factors” may unfairly make Mr. Zuckerberg look good or bad.
I’ll bet that the millions Facebook spent on the deal went to attorneys, financiers, and accountants, with perhaps a few shekels for futurists and seers. Maybe some psychics “liked” the deal. I’ll bet that not much went to strategy stress-testing. I’ll bet that far more effort went into ensuring one party wasn’t deceiving the other than into ensuring the parties weren’t deceiving themselves.
It is possible to assess whether buying WhatsApp was smart, though not with conventional techniques. Conventional techniques focus on synergies and monetizing potential of the deal. Those bits aren’t bad; they’re just not enough. What my current research on quantifying the difference between lucky and smart suggests they miss is unintentional self-deception on competitive strategy.
A savvy and skilled competitive strategist figures out whether a strategy (e.g., buying your very own WhatsApp) makes sense. I don’t mean “makes sense” in that the spreadsheet adds up or the trends are auspicious or the investment bankers’ slides pass the spell-check or the management teams wear complementary t-shirts. Those steps, by default, merely harmonize and confirm prior convictions. I mean “makes sense” by having a coherent, internally consistent strategy that withstands skeptical scrutiny. Strategy sanity checks use techniques like strategy simulations, business war games, etc., to explicitly and forcefully combat the biases and omissions that cause wishful thinking and rosy forecasts.
And we need a different perspective on the “right” price for WhatsApp. What is the right price for an acquisition? The lowest amount you have to pay to make a deal that you can reasonably expect to produce the results you want. If unforeseeable external events pull the rug from under WhatsApp, that doesn’t mean Mr. Zuckerberg paid too much; it means he got unlucky. The important word, of course, is “unforeseeable.” That’s the job of the strategy sanity check. That job doesn’t get done by attorneys, financiers, accountants, futurists, seers, or psychics.
Perhaps Facebook went through a strategy sanity check, perhaps not. The circling pundits and industry analysts won’t. They’ll look for “signs” of overpaying, of slipping, of distress, of anything superficial (little work required) and personal (spicy headlines). That’s my pundit-like prediction.
I predict that the future judgment the pundits hand down will focus on the future outcome of the buy-WhatsApp bet. Smartness, though, is about the present-time decision to place the bet. Strategy is a decision, not an outcome. The decision to place this bet is wholly under Mr. Zuckerberg’s control; its outcome is not. The future judgment by the pundits about the outcome of his bet will be wrong in the same sense that it is wrong to say playing Russian roulette is a good decision if it has a good outcome.
That’s the trick in this essay’s title. Future judgment will be about what the judges choose to see (the outcome) and not about how smart Mark Zuckerberg actually is (the bet). Not that he should care what they would say. He should care only about what we say here at Competing.com.