Thursday, 20 February 2014
Why Facebook is buying WhatsApp for a whopping $19bn
Facebook announced on Wednesday afternoon that it reached an agreement to buy popular mobile messaging startup WhatsApp for an upfront total of $16 billion, including $4 billion in cash and about $12 billion in Facebook shares.
Facebook is betting huge on mobile with an eye-popping cash-and-stock deal worth up to $19 billion for Internet Age smartphone messaging service WhatsApp.
The surprise, mega-deal announced on Wednesday bolsters the world's biggest social network -- which has more than 1.2 billion members -- with the 450-million-strong WhatsApp, which will be operated independently with its own board.
Cofounder and CEO Jan Koum will join Facebook’s Board of Directors, but WhatsApp will continue to operate independently within Facebook, much like Instagram. The purchase price rises to as much as $19 billion once you factor in an additional $3 billion in restricted stock units that will be granted to WhatsApp’s founders and employees vesting over the next four years.
The purchase price is insanely high for a startup with only 55 employees, and many multiples of Facebook’s reported $3 billion bid for Snapchat last year. The $19 billion valuation means Facebook believes WhatsApp is worth over $42 per user. Major companies that have market caps under $19 billion include: United Continental, American Airlines, Ralph Lauren, Marriot International, Campbell Soup, Coach, and Tyson Foods.
It fits with Facebook founder Mark Zuckerberg's focus on being at the center of lifestyles in which billions of people around the world share whatever they wish over the internet using smartphones or tablets.
However, among Silicon Valley internet startups, it’s notable that WhatsApp is actually profitable — but not through the normal monetizing avenues. WhatsApp doesn’t show ads and unlike other large messaging services it hasn’t built out a platform on which users can play games or purchase digital goods. Instead, it charges a $1 annual subscription after one free year.
It is Facebook's biggest acquisition and comes less than two years after the California-based internet star raised $16 billion in the richest tech sector public stock offering.
Zuckerberg said that WhatsApp -- a cross-platform mobile app which allows users to exchange messages without having to pay telecom charges -- was worth the steep price because its blistering growth around the globe has it on a clear path to hit a billion users and beyond.
"Services with a billion people using them are all incredibly valuable," Zuckerberg said while discussing the purchase price during a conference call with analysts.
The deal came from a chat Zuckerberg had with WhatsApp co-founder Jan Koum, whom he described as a "valuable thought partner" and friend of many years.
"Last Sunday evening, about 11 days ago, I proposed if we joined together that would help us really connect the rest of the world," Zuckerberg said.
"He thought about it over the course of the week, came back and said he was interested."
The purchase includes $12 billion in Facebook shares and $4 billion cash. It calls for an additional $3 billion in restricted stock units to be granted to WhatsApp founders and employees that will vest over four years.
Facebook reportedly sought to acquire another hot messaging firm, Snapchat, for $3 billion last year. In 2012 Facebook closed its deal for Instagram, worth some $1 billion at the time based on stock value.