On 19 February 2014, Facebook announced that it reached an agreement about the acquisition of WhatsApp, one of the leading mobile messaging services, for a total value of US$19 billion (US$4 billion in cash, US$12 billion in Facebook shares and US$3 billion in restricted stock units with a vesting period of 4 years). According to the agreement, WhatsApp remains autonomous and will operate independently following its current business principles (such as no advertising, no customer data collection and a business model that offers free messaging for a year and then it charges $0.99 per user each year).
The shocking 19 billion dollar
With this deal, WhatsApp becomes the largest venture-backed acquisition of all time. The acquisition value led to many furious blog posts in the tech community questioning how a company of this size (50 people out of which 37 are engineers) and insignificant revenues can be acquired for an amount that is higher than the market value of corporate giants such as American Airlines, The Blackstone Group or The Marriott International. However, comparing this acquisition with brick and mortar companies is misleading. Instead of comparing WhatsApp with these businesses, it would be more reasonable to contrast its value with other social media-related services.
So, what does WhatsApp actually bring to the party?
A crystalising acquisition strategy
Based on Facebook’s latest acquisition of social, mobile services (Instagram and now WhatsApp) a few common characteristics already become visible:
According to the initial statements and reports, the operation of WhatsApp and its business principles will remain unchanged. However, the capital gained through this acquisition enables WhatsApp to further strengthen its team and to enter previously unsaturated markets such as Eastern Europe or Africa where the emergence of cheap smartphones and the rapidly developing 3G networks enable hundreds of millions of people to join WhatsApp. At the moment, WhatsApp is still in a growth stage (1-million new customers every day), however in the medium term customer retention will become more and more important – and that’s an area where Facebook will bring expertise and experience to the table.
Unquestionably, Facebook paid a hefty price for this mobile messaging service, but gained a very long list of benefits as well. By this bold move, they sent a message to its investors and competitors that they intend to control not only the desktop, but also the mobile communication world. This may negatively impact their stock price in the short run, but it shows a commitment that will be valued in the long run. By allowing these acquired start-ups to operate almost autonomously, Facebook basically becomes a highly diversified “conglomerate” of communication services with an unquestionable lead in the desktop world and an ever strengthening position in the mobile world.
Maybe paying US$380-million for each WhatsApp employee might seem as a half-baked transaction, but it is actually a clear signal that Facebook is ready to fight for its leadership position in the mobile world.