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Facebook’s WhatsApp acquisition: wasted billions or a clever mobile play?

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?

  • 465-million monthly active users
  • Highly engaged customers, around 70% active on any given day
  • Aggressively growing base (+1 million every day)
  • Significant amount of traffic (e.g. 600 million photos uploaded)
  • Access to relatively unsaturated markets for Facebook (India, Brazil, Mexico)

Whatsapp acquisition

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:

  • Facebook acquires companies with critical mass that have the potential to change the way people communicate (Instagram enabled everyone to become a “pro” photographer while WhatsApp substituted SMS in many markets).
  • Facebook does not want to integrate its acquired companies and allows them to operate relatively independently. Unlike Google, they keep these acquired entities separate.
  • Facebook wants to be the leader of communication not only on the desktop, but also on mobile and they are willing to spend as much money as necessary to achieve this. By acquiring WhatsApp they already captured three of the most popular icons from most people’s mobile home screen.
  • Facebook realised when your market capitalisation is around US$175-billion, you have a deep enough pocket not only to build the next big thing, but also to acquire it. This acquisition costs around 10% of their market capitalisation.

Future implications

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.

This article by Daniel Petz originally appeared on dpetz.com, a Burn Media publishing partner.

Author | Daniel Petz: @d_petz

Daniel Petz: @d_petz
Daniel Petz is a Hungarian ex-entrepreneur, London Business School alumnus, tech enthusiast who is currently working as a strategic consultant in the TMT sector of Africa. He has gained experience in Hungary, Sweden, the United Kingdom, South Africa and Nigeria. Daniel is passionate about start-ups, venture capital and he... More

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