Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



2 Things Facebook Isn't Saying About Its $19 Billion WhatsApp Acquisition

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Despite the impressive display of animal spirits inherent in Facebook's (NASDAQ: FB  ) $19 billion acquisition of messaging application WhatsApp, U.S. stocks are slightly higher on Thursday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.12% and 0.17%, respectively, at 10:15 a.m. EST.

Facebook stunned the technology industry yesterday afternoon when it announced that it would acquire the low-profile -- but highly popular -- messaging app for $19 billion in cash and stock, making it far and away Facebook's largest acquisition to date.

WhatsApp's usage statistics are astounding: It claims 450 million active users (with an extra million signing up every day), 72% of whom use the service on a daily basis. The number of messages that flow through its system is thought to be roughly equal to the total volume of SMS messages. All the same, there are a few things that don't seem to add up with this megadeal:

WhatsApp's approach to user data is the exact opposite of Facebook's
As Jim Goetz, writing on behalf of Sequoia Capital -- WhatsApp's lone venture capital investor -- noted in a blog post:

WhatsApp does not collect personal information like your name, gender, address, or age. Registration is authenticated using a phone number, a significant innovation that eliminates the frustration of remembering a username and password. Once delivered, messages are deleted from WhatsApp's server. It's a decidedly contrarian approach shaped by Jan's experience growing up in a communist country with a secret police. Jan's childhood made him appreciate communication that was not bugged or taped.

Where Facebook wants to know as much about its users as possible, WhatsApp only wants to know their phone number. As such, their business models look completely incompatible. To Facebook CEO Mark Zuckerberg's credit, he appears to recognize this and will not try to transmogrify WhatsApp into an advertising-driven application.

Instead, WhatsApp will remain autonomous and ad-free; on a conference call yesterday to discuss the deal with analysts and investors. Zuckerberg said, "I don't personally think ads are the right way to monetize messaging systems." Nevertheless, this raises the question of whether WhatsApp will ever be able to monetize its user base in a manner that would provide a return on the acquisition price. But, then, as WhatsApp CEO Jan Koum said on yesterday's call, "Monetization is not going to be a priority for us. We're focused on the growth." The stark difference between these business models raises another question:

Is this acquisition driven by opportunity or fear?
It's pretty clear that Facebook views any company involved in the social networking and mobile application spaces growing at WhatsApp's rate as a legitimate threat to its business. In this industry, the power -- or the perception of power -- appears to lie with the up-and-coming disrupter, rather than the dominant player.

That's is the sentiment behind Zuckerberg's comment that "WhatsApp had every option in the world, so I'm thrilled that they chose to work with us," and it explains the exorbitant price Facebook was willing to pony up in order to seal the deal. While that is a wonderful dynamic for WhatsApp's employees and investors, it raises an uncomfortable question for Facebook shareholders, or as the Financial Times' Robin Harding tweeted yesterday:

It seems like social networks are terrified of disruption (hence $16bn for WhatsApp). But in that case, what justifies their valuation?

— Robin Harding (@RobinBHarding) February 20, 2014

The more I learn about WhatsApp, the more I'm impressed by the company and the more I'm convinced that Facebook took the right messaging application out of play. However, I'm also convinced that the deal will never prove economic for Facebook and it illustrates that Facebook's executives are less certain of the dominance of the franchise than their shareholders.

Better than Facebook: The 1 stock you must own in 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 20, 2014, at 10:58 AM, DaPurl wrote:

    Nothing more than a slap down to Snapchat for snubbing a 3B offer.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2846664, ~/Articles/ArticleHandler.aspx, 8/29/2015 2:26:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:55 PM
^DJI $16643.01 Down -11.76 -0.07%
FB $91.01 Up +1.28 +1.43%
Facebook CAPS Rating: ***