The technology sector is at fever pitch with never-ending merger and acquisition activities. This corner of the market is in focus this week with another hot technology deal.
The major catalyst is Facebook (FB - Analyst Report), which agreed to acquire the mobile-messaging startup WhatsApp for $19 billion in cash and stock. As per Dealogic, the deal would be the fourth largest in the technology space over the past decade.
Facebook-WhatsApp Deal in Focus
The deal between Facebook and WhatsApp came as a huge surprise. Facebook is the world’s largest and most popular social network company with over 1.2 billion monthly users worldwide. Meanwhile, WhatsApp is the mobile messaging service provider that has grown rapidly since its debut five years ago with more than 450 million monthly users.
Under the terms of the deal, Facebook will pay $4 billion in cash, $12 billion in FB stock, and $3 billion in restricted stock that vests over four years (read: 3 ETFs with the Most Facebook (FB - Analyst Report) Exposure in Focus).
The deal looks to be the biggest purchase for Facebook in its history and could boost its future growth in terms of teen subscribers in which it is lagging. Further, the deal will help the social media giant to expand in the fast-growing mobile messaging market with a dominant position in Europe and India. However, the rest of Asia will remain governed by other local messaging app players like WeChat in China, KakaoTalk in South Korea and Line in Japan.
The Facebook-WhatsApp deal came on the heels of Facebook’s failed attempt to buy Snapchat for roughly $3 billion last year. The transaction is expected to be completed in August should it pass all the regulatory approvals. Upon closing, both WhatsApp and Facebook messaging system will operate as separate entities.
The shares of FB fell nearly 3% at the close in the aftermarket hours on heavy volume following the announcement as investors were disappointed with the high price that FB is paying for the messaging app.
However, the drop seems temporary, as the deal may boost the company’s revenue and subscriber base along with more global expansion, in particular Europe (read: 3 ETFs to Buy on Great Facebook Earnings).
Facebook is up 26% so far this year and has more than doubled over the last year. This increasing share price indicates optimism in the company’s future growth. Further, Facebook currently has a Zacks Rank #2 (Buy) and a solid Zacks Industry Rank in the top 24%, suggesting that the stock would outperform its peers in the coming months.
ETFs to Watch
With that being said, investors could definitely ride out the surge resulting from the deal with lower risk in the form of ETFs. Below, we have highlighted three popular tech ETFs that are heavily invested in this social networking giant and are poised to move upward in the coming days (see: all the Technology ETFs here).
Global X Social Media Index ETF (SOCL - ETF report)
This ETF offers the only pure play in the social media space and amassed $149.5 million in its asset base. The ETF charges 0.65% in fees and expenses and sees good volumes of nearly 210,000 shares a day.
The product tracks the Solactive Social Media Index, holding 27 securities in the basket. Of these firms, Facebook takes the top spot, making up 12.14% of assets. In terms of country exposure, U.S. firms take more than half the portfolio, closely followed by China (26%) and Japan (11%).
The ETF is up nearly 4.8% year-to-date and currently has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook.
First Trust US IPO Index Fund (FPX - ETF report)
This ETF provides exposure to the booming U.S. IPO market by tracking the IPOX-100 U.S. Index. The fund has accumulated $446.2 million in AUM and charges 60 bps in fees a year. Volume is good as it exchanges nearly 129,000 shares per day on average (read: Can IPO ETFs Remain Hot in 2014?).
In total, the fund holds 100 securities in its basket with FB at the top with an 11.56% allocation. The product is slightly tilted toward consumer discretionary at nearly 26% while information technology, energy and healthcare round off the next three spots. FPX has added about 3% so far this year.
PowerShares Nasdaq Internet Portfolio (PNQI - ETF report))
This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The ETF holds 79 stocks in its basket with AUM of $383.1 million while charging 60 bps in fees per year. PNQI trades in lighter volume of less than 75,000 shares a day.
Here again, Facebook occupies the top position in the basket with 10.54% of assets. In terms of industry exposure, Internet mobile application makes up for more than two-third share in the basket, followed by Internet retail (30%). PNQI is up nearly 4% year-to-date and has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a ‘High’ risk outlook.
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