"We're back in the dot-com funny money era."


Mon, Feb 24th, 2014 12:00 by capnasty NEWS

Michael Hiltzik of The Washington Post looks at Facebook's purchase of WhatsApp and says that "if you didn't think Facebook was overvalued before--and there were plenty of investors who had convinced themselves it wasn't--it's hard to avoid that conclusion now."

You can make the argument that Facebook's potential is so great that its stratospheric multiple is justified, but let's hear the argument. And while you make it, adjust for the factor that one rationale for its hunger to acquire WhatsApp is that it's afraid its user base is migrating away from its home-grown Facebook functionality and toward things like WhatsApp.

What's unnerving about deals like this is that they're reminiscent of the dotcom era of the late 1990s, when overvalued shares were thrown around in the merger and acquisition space with inebriated abandon. The big numbers attached to these all-stock or mostly stock deals began to be interpreted as their own justification. ("If X is paying $Y for Z, it must make sense. Those X guys must be some kinda smart.")

Some of those deals worked out, and some were spectacular busts; but the price paid had nothing to do with how they turned out because the stated valuations already were divorced from reality. Gigaom has a partial look at the past here. In a suitably skeptical take, the incomparable Barry Ritholtz observes: "Social networking is forever. Facebook and Twitter may not be."



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