Yesterday after the bell, Facebook (NASDAQ:FB) announced that it's acquiring WhatsApp for $19 billion in stock and cash. WhatsApp is a cross-platform messaging company that offers free SMS messaging internationally and across vendors. Since WhatsApp uses the same mobile data plan that you use for email, you can send text, voice, or video messages across iOS, BlackBerry (NYSE:BB), and Android platforms.
Valuation may not be high...
At first blush, $19 billion seems like a huge number to pay for a company that is relatively unknown in the United States. However, WhatsApp has 450 million monthly active users, so this works out to approximately $40 per subscriber. Also, its business was built in Europe and Asia rather than the United States, so the subscriber base may not perfectly overlap.
... if it can monetize
The question investors need to ask is how these new businesses will be monetized. Facebook announced the Instagram acquisition in April 2012 for $1 billion, and the company still doesn't know how the business will play out over time. Let's look at what Facebook had to say on the earnings call in January:
Instagram, I would say we're just really early with Instagram. So, it's too early to talk about where we're going to be going. We're still trying to learn what the right way to approach that product is, and we're going to move slowly, because we think that's the right thing to do for Instagram
The big winner is BlackBerry
The big winner of this acquisition might be BlackBerry. According to a company blog, BlackBerry now has 80 million subscribers for BBM. Is BlackBerry now a software company? If you take the exact per-subscriber acquisition price of $42.22 and apply it to BlackBerry's customer base, this portion of the business alone would be worth $6.5 billion. On top of that, BlackBerry CEO John Chen appears to be investing for growth in this area. The 2.0 version of Messenger for iOS added voice calls and one-touch file-sharing, in addition to other features. If BBM catches on as a standard for secure messaging, BlackBerry could turn the corner financially. We haven't fine-tuned our estimates of what the shares could be worth but it doesn't seem difficult to get into the low double digits if the manufacturing outsourcing to Foxconn can make the handset business profitable.
I don't see the path to monetizing mobile messaging traffic with an advertising model, but if other companies are willing to pay on a per-subscriber basis for differentiated messaging subs, so be it. AOL was never able to fully monetize its messenger, which was the industry default for several years. I'll bet Steve Case feels a little sick today.
If you think Facebook's shares are overpriced, then it's a good use of capital for the company to use its stock to make this type of acquisition. The concern is what happens over the long term? How many more billions of dollars will be spent on unconnected products that the company is going to try to monetize over time? One billion dollars in 2012 for Instagram, $19 billion this year for WhatsApp. Eventually, it begins to add up.