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How Facebook Is Sharing Risk With WhatsApp

By Daniel Sparks - Mar 2, 2014 at 8:00PM

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Facebook may be paying WhatsApp big money, but the small start-up will share some of the risk in the deal with Facebook.

Most headlines surrounding Facebook's ( FB -1.14% ) announcement to purchase WhatsApp focus on just how big the purchase was. Nineteen billion is no joke -- especially for a 55-employee company. But what else is interesting about Facebook's arrangement to purchase WhatsApp is the way the deal was structured.

With approximately $15 billion of this $19 billion deal in the form of common shares and restricted stock units, Facebook is essentially sharing a large portion of the risk in this very speculative deal with WhatsApp. This is excellent news for Facebook investors because even though WhatsApp is clearly on its way to 1 billion users in the near future, the app only had an estimated $20 million in revenue in 2013. If Facebook were to pay $19 billion in cash in a deal like this, there would be far more risk for Facebook investors. Of course, the fact that Facebook shares have soared about 150% in the last 12 months is a nice bonus too.

In the following video, Fool contributor Daniel Sparks takes a closer look at how Facebook shared risk with WhatsApp in this massive deal.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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