In the news last week, the Federal Reserve announced that it will keep short-term interest rates low for the coming six months. New Federal Reserve chairwoman Janet Yellen also announced a continuing wind down of its asset purchases program.
When asked when the Federal Reserve would consider raising interest rates, Yellen hinted this debate within the Fed could come within the next six months. These comments lead to a sell off on Wall Street, even though the Fed’s policy statement attempted to give assurances that rate increases are not to come this year. The Federal Reserve has vowed to keep rates low until the unemployment rate hits 6.5%. It remains to be seen what the Fed will do when that time period comes. Some worry that a mismatch between EU and US policies could lead to a slower recovery for Europe.
In other news this week, the U.S. and the EU announced tougher sanctions against top Russian diplomats and top financial institutions. VISA and MasterCard, the two top credit card companies in the world, have reportedly stopped providing payment transactions to a few Russian banks altogether. This is most likely because these banks have connects to businesspeople or diplomats subject to the travel bans or asset freezes. This will have more effect on private individuals, who rely on these payment services to fund their everyday operations and because a lot of Russian individuals like to have their assets transferred in cash. These sanctions have been viewed as a joke in Moscow, and Russian financial markets have actually risen as sanctions news unfolds.
The last big news story we’ll cover is the news the IRS announced on Tuesday about Bitcoin, the digital currency that has gained much attraction over the last year. ON Tuesday, the IRS announced they will treat Bitcoin as property, not a currency. Many view this news as not surprising, considering Bitcoin has no form of regulation. Users must now deal with tax issues and file a W-2 Form. The product will also be subject to the capital gains tax. People who buy and sell Bitcoin must now report it as part of their income.
Our topic covered the wave of tech acquisitions by FB and a few other large tech companies. Last month, FB announced their largest acquisition to date, as well as the largest tech acquisition in more than a decade with the purchase of WhatsApp, the most popular message app for smartphones. The acquisition was not surprising to investors, but the price tag certainly was. WhatsApp allows users to send messages over their data plan, rather through an SMS service. This makes the service free to users for the first year, followed by a $0.99 yearly subscription. The response to the purchase was mixed, but positive for the stock. The stock initially declined in after-hours trading the day the deal was announced, but was up over 2% on closing the next day. Some analysts view the deal as a move by FB to appeal to younger audiences, as figures have shown that FB is losing market share among youth. The acquisition also strengthens FB’s position in the mobile market, which has been a light revenue stream for the company. It is very hard for financial analysts to make conclusion on what WhatsApp's revenue stream is, considering they are a private company. This means they don't have to disclose any financial records to the public.
What we believed appealed WhatsApp to Facebook was the amount of users who log on to the service on a daily basis. According to the company, approximately 70% of its users log onto WhatsApp at least once a day, compared to 61% for Facebook. The details of the WhatsApp deal include $4 billion in cash, $12 billion in stock options, and $3 billion to the founders and employees should they remain with the company for four years.
On Tuesday, FB announced another acquisition in virtual reality headset maker OculusVR. The Oculus Rift headset, OVR’s main product, is targeted at simulation gamers and 3D modelers, but is still a few years away from the consumer market. This announcement came as more a shock to investors compared to WhatsApp, because Oculus is not a social platform. Most analysts view this purchase as an imperfect fit with Facebook’s portfolio. This is the first company Facebook has acquired that makes hardware. Zuckerberg has high hopes for the product’s applications outside of gaming, saying: “Oculus has the potential to be the most social platform ever,” he said. ‘“Imagine sharing not just moments with your friends online, but entire experiences and adventures.” Other key figures at Facebook also hold high hopes for OVR. Marc Andreessen, owner of a $2.5 billion VC firm which provided most of OculusVR’s funding, sits on the boards of both companies. What was viewed as a positive was the way FB purchased the company. $400 million of the $2 billion was paid in cash, while the remaining sum was paid in stock options.
While after-hours trading saw FB’s stock price fall 7%, it closed today .77% above its previous close. Perhaps the market likes Zuckerberg’s bright (and 3D) future.
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