Buying WhatsApp

Wow, this is absolutely huge. No, it is one of the biggest tech deals done in a while, a 19 billion Dollar transaction in which Facebook will acquire WhatsApp. The deal will be structured as follows: 183,865,778 A class Facebook shares worth 12 billion Dollars (at 65.2650 Dollars a share), 4 billion Dollars in cash and the balance, 3 billion Dollars in restricted stock (45,966,444 units) to WhatsApp employees, that will vest over the next four years. The shareholders and employees of WhatsApp will now own 7.9 percent of Facebook, you will of course be diluted as a Facebook shareholder, but will get WhatsApp, of course.


Why? I mean, why would Facebook acquire this business for that sum of money? And anyhow, some of us readers (OK, perhaps just a few) might not know what the WhatsApp service is. As per the WhatsApp website, it is simple:

WhatsApp Messenger is a cross-platform mobile messaging app which allows you to exchange messages without having to pay for SMS. WhatsApp Messenger is available for iPhone, BlackBerry, Android, Windows Phone and Nokia and yes, those phones can all message each other! Because WhatsApp Messenger uses the same internet data plan that you use for email and web browsing, there is no cost to message and stay in touch with your friends.

And then as per the Facebook presentation, Facebook + WhatsApp, these are the key metrics of WhatsApp:

You could argue that it was not quite Samsung or the iPhone that blew Blackberry to smithereens, but rather WhatsApp, that took the dominance of BBM away, and the niche functionality that it had in order to offer any handset on any platform the ability to interact with all their friends, no matter what their handset preference or affordability. Yes. WhatsApp killed the BBM star.


For Facebook this means that whilst the Facebook messenger might be a valuable tool, this acquisition goes a long, long way to being able to offer a more complete service. What changes for the users of both platforms is nothing, not much at all. Facebook, like when they bought Instagram, allow the business to operate as they were. It does make founders Jan Koum (a Ukrainian by birth, moved to the US in 1992) and Brian Acton fabulously wealthy, as well as funder Jim Goetz from Sequoia Capital.

The story of the people involved, in particular Koum, should see you say, gosh, these guys deserve every single cent they made. They had nothing, didn't draw a salary, used blankets to keep warm, working on really cheap furniture. Some very useful insight into Koum and Acton here in a Forbes article: The Rags-To-Riches Tale Of How Jan Koum Built WhatsApp Into Facebook's New $19 Billion Baby.


Some choice swearwords in that article, in fact even on the WhatsApp website. You can read the blog from Jan himself on the WhatsApp website, simply titled: Facebook. The company has 450 million active monthly users, 320 million daily users and is grown at around 1 million users per day. It is free, the initial service, but then you pay 99 US cents per year thereafter. But this is how valuable it is, the company handled 54 billion messages on the 31st of December, there could/must be a way in future to mine this database, or do advertising across the platform. For now, however, as per the WhatsApp website: What are WhatsApp's subscription fees? 450 million users at 1 Dollar a year equals 450 million Dollars.


What are the costs of the business to operate? Other than to pay their employees and their server network must be high tech in the extreme? My simple calculation tells me that they (Facebook) bought this business on a 40 multiple forward, in order to kill the opposition quickly and to welcome them to your side of the fence. With a big, big cheque. Everyone has a price, Koum and Acton as per the Forbes article applied for a job at Facebook (but were rejected) before they decided to start WhatsApp. But like many have said, they may have paid way too much here.


But what happens in two or three years time, if they have 1.2 billion, or 1 billion users and decide to charge them 2 Dollars a year? And then 3 Dollars in another two/three years time. If the app has all sorts of added functionality, people would be prepared to pay more for the functionality. And quite quickly, Facebook could have paid less than 10 times forward. Think about it, groups inside of your broader "friend base" on Facebook using the WhatsApp functionality.


Or perhaps Facebook paid too much, I remember the same folks bleating when they bought Instagram. People laughed. Mostly people with no vested interest that must be said. I think that the Zuck is smart and exceptionally quick. This is a big transaction, obviously well thought out. Lastly, let us leave this piece with a chart from that same Facebook + WhatsApp presentation, remembering that WhatsApp is a paid for service, after one year. Astonishing growth off a very small base: