Markets dislike uncertainty. And they certainly dislike uncertainty related to potential corporate breakups -- even if the odds of a full-blown breakup still don't seem very high.
Facebook's (FB) stock is down about 3% since multiple reports arrived on Thursday stating that the FTC is thinking about seeking a preliminary injunction stopping Mark Zuckerberg's firm from carrying out plans to integrate Facebook Messenger, WhatsApp and Instagram's messaging services. Notably, FTC officials want to do this because they're worried that such integration efforts would make it harder to break up Facebook.
The reports come four months after it was learned that the FTC is (as part of a broader investigation of Facebook) studying the Instagram and WhatsApp acquisitions to "determine if they were part of a campaign to snap up potential rivals to head off competitive threats" (from this observer's perspective, it seems pretty clear that they were).
A majority of FTC commissioners would have to support an injunction request for one to be sought. And of course, a federal judge would have to approve the request. But in the event that an injunction was obtained, it would (at least for the near-term) throw a wrench into a pretty strategic Facebook initiative.
As Zuckerberg spelled out in March while outlining Facebook's plans to integrate and support end-to-end encryption across its messaging services, private messaging activity on Facebook's platforms has -- along with sharing to ephemeral stories services and small groups -- been growing much faster than traditional sharing to Facebook and Instagram feeds.
By integrating its messaging services, Facebook would create a more powerful network effect for them as it battles rivals platforms such as Snap's (SNAP) Snapchat and Apple's (AAPL) iMessage. And -- amid the launch of the cross-platform Facebook Pay service and continued work on the Libra cryptocurrency initiative -- it would open up new monetization opportunities, such as giving consumers shopping on Facebook or Instagram the ability to use Messenger or WhatsApp for customer support or order notifications.
Aside from being concerned that the FTC is trying to derail a major R&D initiative, markets are clearly worried that an injunction request signals that the FTC is at least seriously thinking about pushing for a Facebook breakup. But even if this is the case, there are a couple of arguments for investors taking the news in stride.
First, any attempt to use the courts to force Facebook to divest itself of Instagram and WhatsApp is by no means guaranteed to succeed. The FTC would have to prove that serious harm is being done to consumers by having the different platforms under one corporate roof. And even if it initially won a breakup ruling, a lengthy appeals process would probably follow.
Second, it's not a given that a breakup would be bad for shareholders. Zuckerberg would undoubtedly want to keep Facebook in one piece, and there are clear synergies to doing so in areas such as advertising, AI/machine learning investments, e-commerce services and data center infrastructure. Nonetheless, the history of corporate breakups and their impact on shareholders suggests that it might not be such an awful thing for Facebook investors if shares of Instagram and WhatsApp were spun off to them.
For one thing, these are both incredibly valuable platforms with a slew of competitive strengths and long-term monetization opportunities, and markets would be sure to value them accordingly. And in the case of WhatsApp, which generates little revenue for now, it's fair to wonder if the messaging giant would get more aggressive about monetizing its 1.5 billion-plus monthly users if it was an independent company that had to answer to shareholders.
It's understandable that markets aren't pleased about the idea that Facebook's messaging integration efforts could be put on hold. And whether or not a breakup attempt succeeded, it would undoubtedly be a distraction for Facebook's leadership. But at the same time, it's probably best not to panic about the fact that some FTC officials have apparently kicked around the idea of a Facebook breakup.