Facebook will buy fast-growing mobile-messaging startup WhatsApp for $19 billion in cash and stock in a landmark deal that places the world’s largest social network closer to the heart of mobile communications and may bring younger users into the fold.
The transaction involves $4 billion in cash, $12 billion in stock and $3 billion in restricted stock that vests over several years. The WhatsApp deal is worth more than Facebook raised in its own IPO and underscores the social network’s determination to win the market for messaging.
Founded by a Ukrainian immigrant who dropped out of college, Jan Koum, and a Stanford alumnus, Brian Acton, WhatsApp is a Silicon Valley startup fairy tale, rocketing to 450 million users in five years and adding another million daily.
“No one in the history of the world has ever done something like this,” Facebook CEO Mark Zuckerberg said on a conference call on Wednesday.
Zuckerberg, who famously closed a $1 billion deal to buy photo-sharing service Instagram over a weekend in mid-2012, revealed on Wednesday that he proposed the tie-up over dinner with CEO Koum just 10 days earlier, on the night of February 9.
WhatsApp was the leader among a wave of smartphone-based messaging apps that are now sweeping across North America, Asia and Europe. Although WhatsApp has adhered strictly to its core functionality of mimicking texting, other apps, such as Line in Japan or Tencent Holdings Ltd’s WeChat, offer games or even e-commerce on top of their popular messaging features.
The deal provides Facebook entree to new users, including teens who eschew the mainstream social networks but prefer WhatsApp and rivals, which have exploded in size as private messaging takes off.
“People are calling them ‘Facebook Nevers,’” said Jeremy Liew, a partner at Lightspeed and an early investor in Snapchat.
How the service will pay for itself is not yet clear. Zuckerberg and Koum on the conference call did not say how the company would make money beyond a $1 annual fee, which is not charged for the first year. “The right strategy is to continue to focus on growth and product,” Zuckerberg said.
Zuckerberg and Koum said that WhatsApp will continue to operate independently, and promised to continue its policy of no advertising.
“Communication is the one thing that you have to use daily, and it has a strong network effect,” said Jonathan Teo, an early investor in Snapchat, another red-hot messaging company that flirted year ago with a multibillion dollar acquisition offer from Facebook.
“Facebook is more about content and has not yet fully figured out communication.”
Even so, many balked at the price tag.
- $19 billion is…
- 4x the market cap of BlackBerry
- Approximately one-third the market cap of Ford
- 2.8x the market cap of GroupOn
- Effectively equal to the market cap of The Gap
- Slightly more than Sony’s market cap (around 10 percent)
- Almost precisely one-third of HP’s market cap
- 2 nuclear submarines
- 62 percent of Twitter’s market cap
- 76,000 trips to space on Virgin Galactic
- Almost 60 percent of Sprint’s market cap
- 25 Instagram acquisitions
Facebook is paying $42 per user with the deal, dwarfing its own $33 per user cost of acquiring Instagram. By comparison, Japanese e-commerce giant Rakuten just bought messaging service Viber for $3 per user, in a $900 million deal.
Facebook won’t be throwing its advertising weight behind its new acquisition WhatsApp like it did with Instagram. But WhatsApp also won’t be focusing on rolling out the $1 a year subscription fee it currently charges in some countries. Instead, with the financial security Facebook brings, it will dedicate itself to growth.
Monetization was the big topic after Facebook announced it acquired WhatsApp, but Facebook CEO Mark Zuckerberg, CFO David Ebersman, and WhatsApp CEO Jan Koum all said that won’t be a priority for the next few years. And when the time does come to monetize aggressively, it won’t be through ads.
“Our explicit strategy for the next several years is to focus on growing and connecting everyone in the world,” Zuckerberg said. Currently, WhatsApp has a strong presence internationally with 450 million monthly users, but it’s a fragmented market with many competitors. Outpacing them right now is critical, Facebook’s CEO explained. ”Once we get to being a service with 1 billion, 2 billion, 3 billion people, there are many clear ways that we can monetize.”
Zuckerberg bluntly stated “I don’t personally think ads are the right way to monetize messaging.” Beyond WhatsApp, that could mean Facebook doesn’t plan to use ads to monetize its own Messenger app, either. That makes sense, as the highly personal and intimate nature of messaging would cause ads to stick out like sore thumbs.