Facebook: WhatsApp Acquisition Is Overpriced

Recently, Facebook  (NASDAQ: FB  )  has been experiencing success with mobile devices, posting record revenue and user engagement statistics. Now, the company is splurging on an overpriced acquisition of cross-platform messaging app WhatsApp for $19 billion. Facebook has an opportunity to grow in the mobile sector, as its platform apparently accounts for 1 of every 5 minutes of user time spent on mobile devices. But the acquisition price for WhatsApp is very high compared to the value it could extract, and will lead to substantial dilution for Facebook's existing shareholders. 

WhatsApp is rapidly growing
WhatsApp is growing at a rapid-fire rate: It has amassed more than 450 million monthly users and is adding new users at an average rate of 1 million per day. WhatsApp has gained solid momentum because of its cross-platform functionality across all major mobile platforms. It managed to gain 419 million users in its first four years of operations. 

WhatsApp's messaging volume is rapidly approaching the global SMS telecom volume, as 19 billion messages are sent and 34 billion are received every day. WhatsApp's user base remains extremely engaged, uploading 600 million photos, 200 million voice messages, and 100 million video messages every day.  

WhatsApp will operate as an independent unit within Facebook, just like the company's prior acquisition of Instagram for $1 billion. Instagram has been a great acquisition for Facebook, as the photo-sharing platform now has 180 million users. However, Facebook is spending a lot more on WhatsApp. 

There is no doubt that WhatsApp has become tremendously valuable, with close to half a billion users, 320 million of whom, or 70%, use it daily.  But the transaction price will take Facebook many years to recoup, considering that WhatsApp doesn't sell ads -- instead, it charges a nominal fee of $0.99 per year after the end of a year-long trial, which is a completely different strategy than Facebook's own. 

Pricey acquisition
Facebook will pay $4 billion in cash and issue 184 million shares worth $12 billion to WhatsApp, and will also pay an additional $3 billion to WhatsApp's founders and employees in the form of 46 million restricted stock units that will vest over four years. WhatsApp's co-founder and CEO, Jan Koum, will join Facebook's board of directors, and after the deal closes, WhatsApp's shareholders and founders will own roughly 7.9% of Facebook.

WhatsApp will definitely accelerate Facebook's ambitions to connect people around the world, but the price tag of $19 billion seems very lofty. Facebook's current shareholders will face substantial dilution, as the company will be issuing almost 230 million new shares. 

Recently, WhatsApp's competitor in the Internet-mobile communications space, Viber, was acquired by Japanese e-commerce firm Rakuten. Viber had 280 million global users and was acquired by Rakuten for $900 million. In other words, Viber was valued at roughly $3.20 per user. On the contrary, Facebook's acquisition of WhatsApp valued the firm at $42.20 per user, assuming the full price tag of $19 billion for WhatsApp's 450 million users. 

After the deal was announced, BlackBerry's  (NASDAQ: BBRY  )  stock price went up due to speculation of BlackBerry separately spinning off its popular social asset, BlackBerry Messenger. BBM is primarily a non-revenue-generating asset for BlackBerry, but has amassed more than 80 million users after the company decided to make the app cross-platform with Android and iOS. BBM has had a number of potential suitors in the past, including Facebook, and if BBM is valued like WhatsApp at $42.20 per user, the value of its 80 million users is close to $3.4 billion. 

The bottom line
There is no doubt that WhatsApp will make a fantastic new asset for Facebook. The app is growing the number of photos and videos uploaded and exchanged at a rate of more than 100% on a year-over-year basis. But a $19 billion acquisition price for a company that doesn't generate much revenue is extremely high. On a relative basis, other acquisitions, like Viber, have been at more reasonable valuations. Additionally, Facebook's balance sheet will get clobbered with a huge amount of goodwill once the acquisition closes, thanks to WhatsApp's expensive price tag.

WhatsApp has a huge number of users in its funnel, due to the year-long trial process. After the first year, users might drop out to avoid paying for the service and/or opt for a competing service like Viber, BBM, or Skype. Warren Buffett's saying might prove useful in this case: "Price is what you pay, value is what you get." Right now, there might be a sizable discrepancy between the price and the value of WhatsApp for Facebook.

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  • Report this Comment On February 23, 2014, at 12:40 PM, EquityBull wrote:

    $42 per user today. They will be adding over 1M new users per day so in a year they go from 450M to 850M and then halfway into the following six months after that 1 billion users. Now cost drops to $21/user.

    Assume they will continue to add somewhere around 1M to 2M users (yes it may accelerate especially in the USA now that people have heard of it thanks to FB) they can hit 2B by 2016/17. Now the price per user drops to $10.50.

    there is still potential as Zuck sees it for this app to land on over 5B smartphones/tablets/desktops in 10 years time. If so They won't have too hard a time finding a way to extract just a dollar or two out of a user for this app. Whether it is paying $1/yr, $2/yr. Maybe they go back on the "no ads" thing in 10 years and use something less obtrusive like an ad that shows only when you launch or quit the app. Maybe the add is not top or bottom but a message they send you with an offer once a month or once a quarter? Maybe they give you extra add on features if you opt-in for some kind of special message ad every month.

    Plenty of ways to skin the cat if you have massive amounts of users, high interaction, stickiness and a moat. Zuck won't test anything big and is smart because for 3 to 10 years he'll only worry about growing the userbase of WhatsApp and leveraging it to help FB and vice versa. It won't be about getting my 19B back fast as I can

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