Facebook’s Whatsapp Acquisition Deal

Introduction

This was the only talked about thing in Sillicon-Valley for next 48 hours post its occurrence. And why not? It was the biggest social network giant acquiring the fastest growing instant messaging service. Some said it was a safe bet played by Facebook to continue its dominance in the digital world. Some said it was a very smart move by Facebook taking its mission of “Connecting the world’s people” a step forward. Some said the deal was ridiculously overpriced deal traditionally often done by a giant to buy the new kid in the block. But what astonished everyone was that it was a start-up that provided simple messaging service that was priced at a whopping 19 billion USD.

The deal

The deal worth $19 billion had three components: $3 bn cash transaction, $12 bn worth of stock and $3 bn restricted stock option for employees of Whatsapp for the next four years.

What was in it for Facebook? Prospects of Whatsapp:

If we go by financial numbers and asset calculation, there is no way the deal can be justified. Whatsapp had annual revenue of $50 million and an employee count of 55.

1. Making a mark in Mobile space:

However if we dig a little deeper, Facebook has an active monthly user base of 1.2 bn worldwide, but the number seems to reach its saturation level. This is in social network space. In synchronized space, there is no monopoly and there are multiple players competing at a  level playing field. Facebook messenger has evidently failed to make the expected impact in this space. Line had 300 mn users in Japan, WeChat dominated in China with 400 mn active user base.  But Government policies and privacy issues are major obstacles in the process of acquiring. So, Whatsapp seemed to be only lucrative option.

2. Whatapp’s outstanding growth:

Whatsapp had approximately 450 mn user base. It was growing with another 1 mn users’ registration on a daily basis. To add to this, 70% of the registered users were daily active users. And please note, engagement is the key here that Mr. Zuckerberg also admittedly said, “WhatsApp is the only app we’ve ever seen with higher engagement than Facebook itself”. And Facebook had initially gained its popularity through sharing photos of familiar people. The count of the images shared on Facebook and Instagram combined is approx. 400 mn and the same for alone Whatsapp is about 500 mn.

3.  Bringing the digitally active people under a single umbrella:

Facebook acquired Instagram, a digital space that was popular in image sharing business. If we merge three services, in total, we get an user base of approx. 2 billion. Now, if Facebook finds a way to interlink the services, that may witness a new form of digital leader with Facebook holding the umbrella for them.

4. Playing safe:

In the previous week to the deal, Japan’s Rakuten acquired Viber for 900 mn USD. Facebook’s initial target was Snapchat. But the numbers of active users (30 mn) and the photo transaction were far less as compared to Whatsapp. Skype was acquired by Microsoft. None of them were up for sale.

Anticipating growth prospect of Whatsapp, Google offered $10 bn for acquisition. If Google acquires Whatsapp, given they have Google+ and Google Hangout in their kitty, they can interlink them all and make it big in the networking space. Facebook realized this threat. Now, if we try to estimate the BATNA for  Whatsapp, they clearly had an advantage. So, Facebook offered them a deal they could not refuse.

5. Revenue generation way of Whatsapp:

Whatsapp works on a very different revenue generation technique. The app is free for first year and following this, users have to pay $1 per year to avail the service. This seems to a very innovative way of making business. Given its users are already involved and satisfied with the service of the app, they will not hesitate to pay this small amount. But, if the growth rate of the user base, it will not be late to reach the billion mark. That adds to 1x user base revenue. And this is not all. Whatsapp can introduce meaningful ads to make customer’s life easier and better. As Mark Zuckerberg puts it, ” Once we get to being a service that has a billion, two billion, three billion people one day, there are many clear ways we can monetize.”

Conclusion

So, although $ 19 bn deal may seem way too much for a synchronized messaging platform at a quick first glance, deep down it may as well be a win-win for Facebook. Only future will witness it. In the words of Brian Nowak from Susquehana, ” We’ve seen it out of Google before ($1.65bn for YouTube, $12.5bn for Motorola, and most recently, $969mn for Waze). $19bn is admittedly a hefty price tag, but $42 per WhatsApp user is only 9% higher than what Google bought YouTube for. It is 14% more than Facebook paid for each Instagram user. Those acquisitions seemed pricey at the time of the deals too, but they are now key parts of the Google and Facebook ecosystems and monetization stories (which trade at much higher multiples in the public markets).”

References:

http://www.forbes.com/sites/gordonkelly/2014/02/20/5-key-reasons-whatsapp-is-worth-19bn-to-facebook/

http://www.redherring.com/internet/facebooks-whatsapp-deal-is-google-being-left-behind/

http://gigaom.com/2014/02/19/the-irrational-rationality-behind-facebooks-16-billion-acquisition-of-whatsapp/

http://blogs.wsj.com/moneybeat/2014/02/20/facebooks-19-billion-deal-sticker-shock-but-justifiable/

http://www.cloudave.com/33954/entrepreneurs-learn-whatsapp/

http://dashburst.com/facebook-whatsapp-acquisition-strategy/

http://www.ft.com/cms/s/0/bb40e20e-9a02-11e3-a407-00144feab7de.html#axzz2zXFkuPn9

http://www.theguardian.com/business/2014/feb/20/facebook-whatsapp-shares-stock-fall-acquisition-reaction

http://en.wikipedia.org/wiki/WhatsApp

Article by Subhadeep Das

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