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3 Things Investors Need to Know About Facebook Inc.'s Massive Acquisition

By Daniel Sparks - Feb 22, 2014 at 9:19AM

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Nineteen billion dollars. That's the amount Facebook is putting up to buy WhatsApp. Here's what you need to know.

Facebook (META 1.88%) announced a definitive agreement to acquire WhatsApp this week. WhatsApp is a cross-platform mobile messaging app that bypasses SMS technology. By bypassing SMS, of course, cellular fees are avoided -- a meaningful value proposition for smartphone owners in many parts of the world. Why would Facebook want to acquire a messaging service? Perhaps Creative Strategies' Ben Bajarin was on to something when he told USA Today that messaging services like WhatsApp are "becoming new platforms in and of themselves." Or we could opt for the explanation from Facebook's press release announcing the deal:

The acquisition supports Facebook and WhatsApp's shared mission to bring more connectivity and utility to the world by delivering core Internet services efficiently and affordably. The combination will help accelerate growth and user engagement across both companies.

Facebook says that WhatsApp will continue to operate independently and retain its brand.

Image source: WhatsApp.

Here are a few items investors can mull over this weekend as they digest what the acquisition means for Facebook's long-term story.

1. WhatsApp has a massive, active user base.
WhatsApp has 450 million monthly active users, 70% of which use the service every day. Or here is the best way to put it: WhatsApp's messaging volume is "approaching the entire global telecome SMS volume," Facebook said.

Image source: WhatsApp.

Half a billion users is no small number. That dwarfs Instagram's current user base of 150 million, Twitter's 241 million, and LinkedIn's 277 million. 

2. Facebook is paying a premium.
Facebook won't get WhatsApp's massive user base at a bargain price. The company is paying $4 billion in cash, $12 billion in Facebook shares, and $3 billion in restricted stock units to WhatsApp employees. Altogether: $19 billion.

Comparatively, Facebook bought Instagram for $1 billion. For some more entertaining comparisons, consider these valuations:

  • Twitter: $30 billion
  • LinkedIn: $23.5 billion
  • Tesla Motors: $26 billion

3. WhatsApp is growing incredibly fast.
The service is adding more than 1 million registered users per day, Facebook says. "WhatsApp is on a path to connect 1 billion people," said Facebook CEO Mark Zuckerberg. "The services that reach that milestone are all incredibly valuable." 

But is WhatsApp worth $19 billion?
That's the big question. It sparks a bigger picture concern: Just how valuable is a network effect? Online network effects, or a competitive advantage sourced from a network that grows stronger with every additional user, are still a new phenomenon -- especially at a scale of half a billion and larger. Just how valuable are these network effects? How sustainable are they? Obviously, Facebook believes that network effects of this scale are not only powerful platforms, but sustainable, too.

What's the takeaway for investors? Facebook has some serious guts in its future. While it's arguable that the WhatsApp acquisition makes sense, it's less certain that the app was worth $19 billion. Until more conclusions about the acquisition can be made about how it will help Facebook in the future, there's no reason to have incremental confidence in Facebook's long-term story after this pricey acquisition.

But I could be wrong. Fool contributor Daniel Kline says Facebook's acquisition of WhatsApp "has the potential to be a prudent purchase" and maybe even a bargain deal.

Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Facebook, LinkedIn, Tesla Motors, and Twitter and owns shares of Facebook, LinkedIn, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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