WhatsUpp with Facebook buying WhatsApp? An investor’s perspective

Make no mistake, Facebook buying WhatsApp is absolutely huge. In fact, it is one of the biggest tech deals done in a while. A US$19-billion transaction, the deal will be structured as follows: 183 865 778 A class Facebook shares worth US$12-billion (at US$65.2650 a share), US$4-billion in cash and the balance, US$3-billion Dollars in restricted stock to WhatsApp employees, that will vest over the next four years. The shareholders and employees of WhatsApp will now own 7.9% of Facebook. That means that the average Facebook shareholder will be diluted, but will get WhatsApp, of course.

Why? I mean, why would Facebook acquire this business for that sum of money? As with most things, it’s worth having a look at the numbers. As per the Facebook presentation, Facebook + WhatsApp, these are the key metrics of WhatsApp:

You could argue that it was not quite Samsung or the iPhone that blew BlackBerry to smithereens, but rather WhatsApp, that took the dominance of BBM away, along with the fact that it offers any handset on any platform the ability to interact with all their friends, no matter what their handset preference or affordability. Yes. WhatsApp killed the BBM star.

For Facebook this means that while Facebook messenger might be a valuable tool, it can now go a long, long way to being able to offer a more complete service. What changes for the users of both platforms is nothing, not much at all. As when Facebook bought Instagram, it will allow the business to operate as it was. It does make founders Jan Koum (a Ukrainian by birth, moved to the US in 1992) and Brian Acton fabulously wealthy, as well as funder Jim Goetz from Sequoia Capital.

The story of the people involved, in particular Koum, should see you say “gosh, these guys deserve every single cent they made”. They had nothing, didn’t draw a salary, used blankets to keep warm, working on really cheap furniture.

There are some choice swearwords in the article linked to above, but there are also plenty on the WhatsApp website.

The company has 450-million active monthly users, 320-million daily users and is growing at around one-million users a day. Intuitively its revenue model doesn’t make sense. The initial service is free, but then you pay 99 US cents per year thereafter. But this is how valuable it is, the company handled 54-billion messages on 31 December. There could/must be a way in future to mine this database, or do advertising across the platform (not that the company’s ever been open to it). For now however it has to rely on subscription fees. 450-million users at US$1 a year equals US$450-million in revenue (barring anyone the service has never got around to charging).

What are the costs of the business to operate, other than paying its employees and keeping up what must be a very high-tech server network? My simple calculation tells me that Facebook bought this business on a 40 multiple forward, in order to kill the opposition quickly and to welcome them to your side of the fence. With a big, big cheque. Everyone has a price and, as per the Forbes article, Acton applied for a job at Facebook (but were rejected) before him and Koum decided to start WhatsApp. As many have said though, Facebook may have paid way too much here.

But what happens in two or three years time, if WhatsApp has 1.2-billion, or one-billion users and decides to charge them US$2 a year? And then US3 in another two or three years time. If the app has all sorts of added functionality, people would be prepared to pay more for the functionality. And quite quickly, Facebook could have paid less than 10 times forward. Think about it: groups inside of your broader “friend base” on Facebook using the WhatsApp functionality.

Or perhaps Facebook got it right. I remember the skeptics bleating when it bought Instagram. People laughed. Mostly people with no vested interest, it must be said. I think that the Zuck is smart and exceptionally quick. This is a big transaction, obviously well thought out. Lastly, let us leave this piece with a chart from that same Facebook + WhatsApp presentation, remembering that WhatsApp is a paid for service, after one year. Astonishing growth off a very small base:

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This article by Sasha Naryshkyine is adapted from the Vestact newsletter and republished with permission.