Even by Silicon Valley standards, paying $19 billion to buy a mobile app company seems kind of crazy.
But Facebook CEO Mark Zuckerberg’s decision to pay such a head-scratching premium for WhatsApp showed he was looking far beyond the usual numbers investors use to determine a company’s value.
And his view of the future may include a complete reinvention of his own social network.
“Facebook right now is preparing for a world in which people care less about Facebook,” said David Berkowitz, an executive of the digital marketing firm MRY. “Facebook needs to take this long view. I don’t think anyone can afford to be so cocky to think Facebook will be around forever.”
Facebook agreed to acquire WhatsApp for $4 billion in cash and $12 billion in Facebook stock. To sweeten the pot, WhatsApp’s founders and employees will receive $3 billion in restricted stock units, which in total will give them about an 8 percent equity stake in Facebook.
The offer, the largest buyout in Silicon Valley history, reportedly trumped a competing bid of $10 billion from Google.
To put that in another perspective, Facebook is paying 19 times more money for WhatsApp than it paid for Instagram in 2012, more than 11 times above what Google paid for YouTube in 2005, and $4 billion more than the current stock market value of Southwest Airlines.
But the deal can’t be judged by standard Wall Street mergers-and-acquisitions metrics. Normally, an investment bank will value a company based on multiples of the target’s operating profit. But in the social media-driven world of Silicon Valley, users, not revenue or profit, provides a company’s worth.
So what did Facebook get for its $19 billion? For starters: WhatsApp’s current 450 million monthly active users, which is increasing by 1 million users per day and “on a path” to reach 1 billion people around the world, Zuckerberg said.
Marc Weiser, founder and managing director of early stage investment firm RPM Ventures, said Facebook’s bid reflects how the company – and indeed Silicon Valley – looks at acquisitions.
“You justify the merger by framing it as a decades-long strategy,” Weiser said. “You want to be the dominant player in mobile. And you can control the mobile industry by controlling all of the apps.”
Martin Garner, a London analyst for mobile industry consulting firm CCS Insight, said Facebook was defending itself on two fronts, against being “quickly displaced by the ‘next big thing,’ but an even greater concern is that ‘the next big thing’ will be acquired by a competitor.”
But Facebook clearly also wanted what the app’s customers were doing every day – 19 billion SMS text messages sent, 34 billion messages received, 600 million photos, 200 million voice messages and 100 million video messages.
WhatsApp also reaches into international markets Facebook wants to penetrate. And WhatsApp’s core function, text messaging, makes it the kind of app favored by teens and young adults whom Facebook worries will slip away from the social network.
“What Facebook got was a communications platform which was beyond what they could do within their traditional social media design,” said tech analyst Tim Bajarin, president of Creative Strategies of San Jose.
“What I don’t know enough about is how they came up with that $19 billion valuation number, which on the surface sounds like they highly overpaid,” Bajarin said. “But on the other hand, if you really look at it strategically, then it has great value to Facebook.”