 "Does WhatsApp deal have implications for Infosys, TCS business model?")
Facebook has agreed to buy the mobile messaging service provider WhatsApp for $19 billion in cash and stocks. WhatsApp is just 4 years old while Facebook is 10 years old with a market capitalization of $173 billion as of 19th Feb 2014. This is the second big ticket acquisition by Facebook that bought the photo sharing website Instagram for $1 billion.
WhatsApp has just 55 employees while Instagram had just 11 employees at the time of acquisition. Facebook had 6300 employees as of 31st December 2013. On a market capitalization to employee ratio, WhatApp ratio is $345 million, Instagram ratio is around $90 million and Facebook ratio is around $27 million.
The first takeaway here is that a small team that uses technology and innovation effectively can create huge wealth for all stakeholders. A far cry from the market capitalization to employee ratio of outsourcing companies where it is just $0.2 million or even lower. It is clear that outsourcing, while a lucrative model given low cost labour is not a hugely productive model.
The future of outsourcing could be in doubt if more and more companies innovate and optimize technology for maximum benefit. Indian companies such as Infosys and Tata Consultancy Services, which bank on outsourced business, may find their business model redundant, if technological advancement enables coding automation.
It is easy to write off the valuations of WhatsApp as a one off phenomenon. There is only one WhatsApp and one Facebook will be a common disclaimer for propagandists of outsourcing model or for other types of business models. However, the important point here is that there will be thousands of WhatsApp and Facebook aspirants and they will change the way the world functions.
WhatsApp in its four years of existence has made the SMS redundant. Similarly there could more such innovators coming up to make redundant many products, services or functions that we use everyday. Hence every business has to be evaluated on whether it will exist in the future. It does not matter if the business has had a successful run for many years or has been in existence for a long period of time or even if it is rocking at present.
Impact Shorts
More ShortsThere will be enough number of naysayers on the valuations given to Facebook and WhatsApp. Time will tell if Facebook can continue to deliver the value that it has generated over the past 10 years. The “I told you so” principle will not work even if Facebook fades away because it would have caused enough disruptions to businesses that there will be a new landscape emerging every time one business fades away.
It is time to step back, evaluate the future landscape and then choose the right direction.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors
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