Facebook Acquires WhatsApp for $19 Billion

Nigel Thomas
20 Feb, 2014
New York City

Facebbok agreed to acquire fast growing Internet based messaging service WhatsApp for $19 billion. The expensive purchase works out to be $40 per active user. The acquisition is the largest by Facebook so far and follows the Instagram purchase for $1 billion.

Facebook agreed to acquire the popular messaging service WhatsApp for a total of $16 billion and spend one third of its cash and dilute shareholders by 8%.

Facebook will pay $4 billion in cash and $12 billion in company’s stock for the rapidly growing cross-platform mobile messaging company that is very popular outside the U.S.

Facebook also agreed to pay $3 billion in restricted stock units that will vest over the next four years.

Expensive Deal

WhatsApp valuation at $40 a user is not cheap even when compared to previous deals done in this space.

Facebook acquired Instagram for $30 per user and the service was largely viewed as a way to sell more ads, Skype was sold to eBay for $48 a user but it failed to live to its expectations and did not fit with the e-commerce goals of the online platform operator.

Facebook is valued in the public market at $140 a user.

Focus on Better Product Development

The Mountain View, California based company was started by two Yahoo executives who focused on providing messaging services regardless of the operating system and the location of the user.

The company was started in 2009 by two founders Jan Koum and Brian Acton who dedicated the company resources on providing a reliable, clean and ad free messaging platform.

The company founders, unlike its competitors eschewed media attention and focused on providing an application that is easy to use. WhatsApp, when started faced more than two dozen competitors around the world and most focused on ad based revenue model.

WhatsApp has become popular text messaging service, the way Skype has become voice and video communication service using Internet as the backbone.

Size Matters

WhatsApp has more than 450 million “active” users and the company reached that user base faster than any other company in history.

In the last nine months the company has added 200 million active users, ahead of Twitter and continues to add more than one million people a day, according to only outside investor Jim Goetz at Sequoia.

Sequoia Capital invested $8 million in the company in 2011 and later led a round of $50 million for a stake little over 15% which is now worth $3.5 billion.

Lean Operation

Only 32 engineers support the entire WhatsApp service and the company has only 55 employees operating from an unmarked office and the company does not even have a marketing or press relations.

The entire growth of the company has been supported by the word of mouth and user interaction and the company’s raid on the users contact list on the phone.

The service costs 99 cents a year, after one year of free use and the service is more popular in Europe and developing countries where telecom carriers charge for instant messaging.

The contrarian product development approach by two founders also promises users that no messages are saved after they are delivered.

The company had less than ten users when started five years ago now delivers 50 billion messages a day.

Big Pay Day

""WhatsApp is on a path to connect one billion people. The services that reach that milestone are all incredibly valuable,"" said Mark Zuckerberg, Facebook founder and CEO.

""I've known Jan for a long time and I'm excited to partner with him and his team to make the world more open and connected.""

Jan Koum, WhatsApp CEO, in a statement said that the company will remain autonomous and operate independently.

Facebook will issue 183.865 million shares of Class A common stock and in addition the company will grant 45.966 million restricted stocks to WhatsApp employees worth $3 billion.

The newly issued shares including rights will represent 7.9% of Facebook shares based on current outstanding shares of 2.55 billion of Class A and B shares and 139 million dilutive securities.

Rise of Smartphones

Mobile messaging market has heated up in the last two years as nearly one billion people around the world now have a smart phone.

Internet based text messaging is one of the most popular application used on these phones because in most countries carriers charge hefty fee for messaging.

Plenty of Risks Ahead

However, acquisition in fast evolving tech space are not without risks.

News Corp in 2005 acquired Myspace for $580 million and sold it for $35 million in 2011 after users left in droves to Facebook.

WhatsApp is popular for now in many European and South American countries and in India. However, the company has not disclosed what the attrition rate is at the time to pay 99 cents come.

People who generally look for free apps will migrate to a new free app as soon as the company demands for payment and collecting 99 cents from countries with different currencies is also not without costs.