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In 2012, Facebook (NASDAQ: FB ) bought Instagram for $1 billion. At the time, the photo-sharing service had just 13 employees . No one keeps historical records of enterprise values per employee, but you can bet that Instagram, at a price of $77 million per employee, was one of the most valuable companies on a per-head basis in human history.
Last week, Facebook beat its own record, gobbling up the messaging service WhatsApp, with about 55 employees, for $19 billion, or $345 million per head. It's easy to criticize Facebook for overpaying, and many have. After all, WhatsApp's only revenue stream comes from the $1 a year it charges its 450 million users after the first year -- the initial 365 days are free. Analyst Rob Enderle called it a sign of "desperation" for Facebook, saying, "This is crazy money. I think they massively overpaid for this. They are so worried they are bleeding users that they are trying to get their user count up by buying companies that have users."
By the most basic standard, Facebook did overpay for WhatsApp. The messaging app was only valued at $1.5 billion in its final round of financing last July, but there's a long history of tech companies "overpaying" for acquisitions. Google's (NASDAQ: GOOGL ) 2006 purchase of YouTube for $1.6 billion and Facebook's acquisition of Instagram are just two of the better-known examples, and both of those have turned into key components of their parents' empires. But the so-called overpayment isn't the only issue critics like Enderle are overlooking with Facebook's latest acquisition.
Facebook can afford it
A closer look at Facebook's purchase reveals that it's only paying $4 billion in cash for WhatsApp. The rest will come in stock, $3 billion of which is restricted and will vest over the next four years.
And after Facebook stock's recent run, no investor would have reason to complain about a little share dilution. Facebook is worth $180 billion, and its sales are expected to grow 43% this year. There is no other company in the world that's worth that much and growing that fast. Facebook dropping $19 billion on WhatsApp sends a message to rivals like Google, Twitter (NYSE: TWTR ) , and any other comers in the social-media arena that if they want to bid on the latest industry craze, they better bring daddy's credit card. And it lets the start-ups know to knock on Facebook's door before accepting a lower offer from a competitor. Facebook is throwing around its weight. It wants the world to know that it plans on dominating this infant industry.
Facebook is in its nascence
To call this desperate a move seems to misunderstand the situation that Facebook is in. This is a 10-year-old company with more than 1 billion users and the indisputable leader of market's fastest-growing sector. CEO Mark Zuckerberg has not racked up the acclaim that Steve Jobs or Jeff Bezos have for taking the long view, but Zuck has proven his savvy and he understands that the namesake site alone is not enough to dominate social media for the next generation. The company needs to swallow up smaller upstarts like Instagram and WhatsApp, and integrate them into its empire in order to fortify its place at the head of the social-media pack. As the sector leader with a huge valuation, Facebook is in a powerful position, and it needs to use that power to its advantage. With this strategy, it's taking a page straight out of Google's playbook. The search giant has made dozens of acquisitions on its way to Silicon Valley eminence, among them YouTube and Android. It's hard to imagine Google today without its tentacles in video and smartphones.
The power of expression
Technology is changing the way we live and do business. Commodities that humans have depended on for centuries are on the decline: paper, oil, and even brick-and-mortar retail stores. But in the information age the ability to express oneself has only grown exponentially. Like the printing press, railroad, and telephone before it, social media is changing the way we communicate; it is becoming this era's transformative technology, making expression the 21st century's most valuable commodity. The human desire to communicate with one another will never go away, which makes an industry based on user-generated content so brilliant. Facebook understands this, which is why it was willing to pay $19 billion for WhatsApp, and didn't hesitate to offer $3 billion for Snapchat, a service that most American adults haven't even heard of.
This is why companies like Twitter command such steep valuations. While profits have yet to come to Twitter, as a unique platform for both communication and search it has the rare potential to overthrow both Google and Facebook from their leadership positions.
Facebook isn't crazy. It knows this is just the opening volley in a long battle. And the more weapons it can add to its arsenal, whether they be Instagram, WhatsApp, or a homegrown innovation, the better prepared it will be to expand its empire well into the future.
The social media stock our tech chief loves
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