Could A Facebook Breakup Boost Share Value? Experts Weigh In

Facebook Inc FB faces a suit from the Federal Trade Commission and 46 states for anticompetitive behavior.

What Happened: The Federal Trade Commission and states filed a suit against Facebook aimed at forcing the sale of Instagram and WhatsApp. The key point of the lawsuit is Facebook extinguishing competition by acquiring them rather than allowing them to compete.

Facebook acquired Instagram for $1 billion in 2012 and WhatsApp for $19 billion in 2014. The suit would see the acquisitions to be undone and Facebook spin them off into separate companies.

Why It’s Important: Facebook has three billion monthly users and is one of the largest technology companies. The company has 200 million users in the U.S. alone.

The suit will be widely watched as it could lead to additional calls for breakups of large technology names if successful. The spotlight on the past acquisitions could also make large acquisitions harder to complete in the future.

See Also: Facebook Sued By Australia Over Collecting User Data Without Consent

Possible Outcomes: Four possible outcomes are seen from the suit by Gene Munster and David Stokman at Loup Ventures.

The most likely outcome is Facebook pays a big fine. Other outcomes include future merger and acquisition activity gets more difficult, Facebook wins and nothing happens and Facebook is broken up.

Loup Ventures calls the worst-case outcome for the company the second option, which makes deals harder to complete in the future.

Breaking Up Facebook: The best possible outcome for Facebook is breaking up the company, according to Loup Ventures.

“We see a scenario in which investors view the sum of the parts as greater than the whole, and collectively increase Facebook’s valuation,” Munster and Stokman argue.

Each segment of Facebook would have strong reach compared to competitors. The new units would still be able to retain engagement and advertisers, Loup said.

Stephen Weiss of Short Hills Capital doesn't think Facebook should be broken up. He says it's hard to determine the sum of parts without knowing the sharing of resources, access to capital and cross-selling.

"There is almost always a conglomerate discount which would not apply if parts separated and each would rise in value with different management teams focused on driving growth," Weiss told Benzinga.

"A breakup isn't happening," Wedbush analyst Michael Pachter told Benzinga. "Come back to me in 10 years and we can talk about the sum of the parts, and how a breakup could benefit shareholders. It's not relevant now."

Facebook giving its products away to consumers for free could help the company win the suit, according to Pachter.

FB Price Action: Shares of Facebook are up 34% year to date. Shares are down about 3% since the FTC suit was announced.

Photo by Tracy Le Blanc from Pexels