By: Victor Mupunga, Research Analyst at Old Mutual Wealth Private Client Securities
Facebook: Investors should pay close attention to talk of breaking up the business
Local investors exposed to tech giant, Facebook, should consider the news that US authorities are being urged to investigate the possibility of breaking up the company, as a double-edged sword.
Facebook is yet again in the spotlight. This time, ex-founder, Chris Hughes, sparked controversy when his piece, published in the New York Times, made a passionate plea for authorities to consider unbundling Facebook, which owns Instagram and WhatsApp. His main concern? Mark Zuckerberg, who is the CEO, Chairman and a material shareholder in Facebook, has too much power.Victor Mupunga, Research Analyst at Old Mutual Wealth Private Client Securities, says that while US authorities are a far way off from acting on Hughes’ pleas, there is merit to his argument. “The reality is that there are concerns with Facebook’s governance structure. Breaking up Facebook won’t solve the issue, but it would be a step in the right direction,” says Mupunga.
He adds that Facebook has a dual class structure of class A and class B shares with different economic and voting interests. Zuckerberg has the majority of voting rights (60%). “With Zuckerberg controlling the voting rights, it’s not about whether the board is independent, but more around how accountable he is to them. It is unrealistic to think that he is, given the dual CEO and Chairman roles he holds. It appears that the board performs more of an advisory role than an oversight function.” However, Mupunga cautions that breaking up Facebook would ultimately destroy the stock’s current value. “Facebook is worth more as a whole as opposed to separate, standalone businesses, due to its ability to leverage data off each of the platforms. The impact on investors would largely depend on how the authorities would impose such a breakup.”
Mupunga explains that there are two possible scenarios: A forced sale of some of the platforms, or an unbundling of each platform to current shareholders with each listing as a separate business. “Within Facebook there are faster growing platforms and some that are speculative in terms of how they will be fully monetised. Most investors may currently prefer faster growing Instagram compared to the more stable Facebook or uncertain WhatsApp,” says Mupunga. “Given the choice of separately listed platforms, we would expect divergent performances. Each platform would also then need to disclose more details about its performance and prospects, something that currently does not happen.”
He says that currently Facebook’s multiple platforms provide fast growth, stable prospects and optionality, which is great for investors. The sharing of user data across platforms will also be less likely in the event of a breakup, which over time would make the company less proficient at knowing user preferences. “From a South African perspective, in the event of a breakup, we will likely follow the lead implemented in other major jurisdictions. From a user perspective though, we suspect the question would be how previously free services would be monetised. As a standalone platform, there is increased urgency for each platform to be profitable.”
Mupunga says that the biggest risk currently for Facebook is regulation and it could come in the form of forcing the business to breakup or how it uses data. He adds that despite the numerous management errors over the last few years, Facebook continues to do well.
“Facebook does what probably only Alphabet is able to mimic at that scale, which is using data to sell targeted adverts or venture into other businesses. As the digital age progresses, the importance of data cannot be overestimated. Between Facebook and Google’s four billion users, it is hard to think of two businesses that are better positioned to benefit from the trend of utilising data at scale,” concludes Mupunga.