A couple of days ago, the social networking site Facebook Inc. (FB, Financial) made global headlines when it decided to purchase the mobile messaging app WhatsApp for a whopping $19 billion. The price tag is lofty by any measure. In fact, this is the biggest internet acquisition in more than 10 years.
According to the terms of the deal, Facebook will pay $12 billion in stock, $4 billion in cash and $3 billion in restriction shares which will be granted to WhatsApp’s founders and employees over the next 4 years. According to data compiled by WSJ, this is extremely hefty for a company with just 55 employees. In another article, Bloomberg reported that WhatsApp’s enormous price tag shows that Marck Zuckerberg has valued the messaging app developer like a company that makes “life-saving drugs” (since such pharmaceutical companies trade at extraordinary multiples of sales).
Reason # 1
However, this also indicates that Facebook’s founder and CEO Marck Zuckerberg will stop at nothing to keep his company growing by buying out the competition. WhatsApp competes with some of the biggest mobile messaging apps such as Tencent’s WeChat and Facebook’s own Facebook messenger.
With this kind of aggressive attitude, Facebook’s shareholders should be glad that Mark Zuckerberg is at the helm of the affairs.
Moreover, this also shows that Facebook is being run by a pragmatic management. The company is not one of those organizations that take a principled stance and only insist on growing on the back of their own products. Facebook, on the other hand, is willing to accept that WhatsApp is a much better product and instead of spending all the time and money on developing a similar product from within, it just went after WhatsApp.
Reason # 2
WhatsApp has 450 million monthly active users located all around the world. In terms of number of users, WhatsApp is dwarfed by Facebook that boasts of 1.2 billion users. However, WhatsApp has a higher percentage of daily active users (70%) as compared to Facebook (62%).
Moreover, WhatsApp’s user base has been growing rapidly. The company is believed to attract around 1 million new users on a daily basis. and as a messaging app, WhatsApp is considerably more popular than Facebook’s messenger. Therefore, the acquisition will strengthen Facebook’s position in mobile.
Reason # 3
Analysts have pointed out that Facebook has struggled with retaining younger users that seem to be slipping away. However, with the acquisition of an app which is already popular among this user base, Facebook should be able to retain these valuable users.
It should be noted that unlike North America, WhatsApp is more popular than Facebook in Europe, Africa, Australia and Latin America; particularly among the young crowd. With this acquisition, Facebook can considerably improve its footprint in these key markets.
Reason # 4
If Facebook had not purchased WhatsApp, then some other tech giant would have. According to some industry insiders, that tech giant would most likely have been Google (GOOG, Financial). According to unconfirmed reports, Google has been trying, unsuccessfully, to purchase the messaging app for years.
If Google, or any other company had done that, then WhatsApp would have emerged as a potential threat.
Reason # 5
Both Facebook and WhatsApp are strategically aligned and therefore, this acquisition makes a lot more sense than some of the other ill fated acquisitions. For instance, some of the other acquisition that did not make any strategic sense have been Ebay’s (EBAY, Financial) acquisition of Skype, AOL’s (AOL, Financial) acquisition of the instant messaging software ICQ, or, the most recent one, Microsoft’s (MSFT, Financial) acquisition of Skype.
Facebook’s acquisition, however, is much more logical as the two companies share the same objectives of improving the social networking experience, although they do this through two different products.
Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.
