With so much cash thrown around in Silicon Valley, it’s not easy for an acquisition to cause a stir. Facebook’s (FB) acquisition of WhatsApp last year did just that – surpassing Google’s (GOOG) $3.2 billion purchase of Nest Labs and Apple’s (AAPL) $3 billion Beats Electronics procurement – to become 2014’s top acquisition and one of the largest tech buys of all time.
WhatsApp, a text messaging app used widely across the globe, stole headlines with its initial $16 billion bid from Facebook. In 2013, the app lost $138 million and brought in $10.2 million in revenue. So how did the company win over Facebook? This article examines Facebook’s record breaking acquisition and the steps it took to get there.
WhatsApp is an ad-free mobile application that allows users to send unlimited messages to contacts without using the wireless network or sustaining data fees. The app is free to download (but a $1 subscription kicks in after the first year) and is an alternative to the cell provider’s traditional text messaging platform. The app was founded by Jan Koum and Brian Acton, two former Yahoo! (YHOO) executives.
When Facebook announced its plans to acquire WhatsApp in February 2014, WhatsApp's founders attached a purchase price of $16 billion: $4 billion in cash and $12 billion remaining in Facebook shares. This price tag is dwarfed by the actual price Facebook paid: $21.8 billion, or $55 per user.
Facebook agreed to pay $19.6 billion — adding $3.6 billion to the original price as compensation to WhatsApp employees for staying on board at Facebook. However, Facebook share prices soared to $77.56 from $68 by the time the regulatory approval process concluded in October. By then, the agreed upon 184 million Facebook shares inflated the final sale price by an additional $1.7 billion.
WhatsApp’s six-month revenue for the first half of 2014 totaled $15.9 million and the company incurred a staggering net loss of $232.5 million, though the majority of that loss was for share-based compensation.
WhatsApp is by far Facebook's largest acquisition and one of the biggest Silicon Valley has ever seen. It is over 20 times larger than Facebook’s Instagram acquisition, which made quite the splash in 2012. That begs the $22 billion question: why did Facebook break the bank to buy WhatsApp?
The answer is user growth. Over 500 million people use WhatsApp monthly and the service currently adds more than 1 million users per day. Seventy percent of WhatsApp users are active daily, compared to Facebook’s 62%. Additionally, WhatsApp users send 500 million pictures back and forth per day, about 150 million more than Facebook users.
The app launched in 2009 and will reach 1 billion users before long thanks to its astronomical growth. As of December 2014, Facebook has 1.39 billion monthly active users. With a shared mission of enhancing global connectivity via internet services, the merging of forces will likely accelerate growth for both companies. For Facebook, user growth comes first and monetization later.
WhatsApp will help fuel Facebook growth in developing markets where internet connectivity is sparse but where WhatsApp is widely used. Facebook will then gain access to these mobile user bases. Connecting to WhatsApp users in these areas will also aid Facebook’s Internet.org initiative, Facebook CEO Mark Zuckerberg’s plan to implement internet access to the two-thirds of the world not yet online.
However, Facebook does believe it will profit from WhatsApp down the line as phone calls become obsolete and mobile messages reign. This is why Zuckerberg spent one-tenth of his company’s market value to buy the text messaging app, nearly doubling Google’s bid. In doing so, he successfully kept the company out of the hands of other tech rivals.
Previous Facebook Acquisitions
Facebook’s acquisition strategy focuses on three key areas: the procurement of new talent, acquisition of new technologies, and buying out the competition. Facebook has acquired 42 companies since 2007.
Parakey, a web-operating system that makes image, video, and writing transfer to the web easier, was Facebook’s first acquisition. Facebook purchased the company for an undisclosed amount in 2007. In return, Facebook integrated Parakey’s technology into its mobile application and welcomed aboard the company’s talent, which worked on the development of the Firefox browser.
The Menlo Park-based company acquired FriendFeed in 2009 for $50 million. The technologies from FriendFeed, a site that aggregates real-time news and social media feeds, contributed to Facebook’s “like” button and updated news feed features.
In 2012, Facebook announced its plans to acquire Instagram, a popular photo sharing site that boasts 200 million active users. Not only did Facebook plan to enhance its own photo sharing features, but it also wanted to prevent any competitor from getting to the well-liked company first. Facebook bought Instagram for $1 billion: $300 million in cash and the remainder in over $700 million in Facebook stock.
The Bottom Line
WhatsApp plays a significant role in the global areas crucial to Facebook growth. By putting monetization efforts on hold, Facebook is focusing on the future of international, cross-platform communications. Through the acquisition of WhatsApp, the tentacles of Facebook are closer to reaching billions of people, and with a market of that size, Facebook is sure to find a way to eventually cash in.