Facebook-WhatsApp, a crazy deal?

In recent times, the most renowned billion dollar acquisitions have been in the web domain. To name a few, Yahoo acquired the famous Tumblr  for  $1.1 billion, Microsoft acquired Skype for a whopping $8.5 billion, Facebook acquired Instagram for $1billion and the Japanese firm Rakuten acquired Viber for $0.9 billion. India too isn’t behind in the website race. The online shopping giant Flipkart is in talks for merging with its competitor Myntra at Rs.300 crores, while the restaurant guide Zomato is valued at Rs.1000 crores.

But the recent most talked about deal is Facebook’s acquisition of WhatsApp for an astonishing $19 billion. This has spawned a mix reaction from people worldwide. Most of them feel that WhatsApp has been highly overvalued. When compared to the Indian Conglomerate Giants, only 14 listed companies are valued more than WhatsApp. These include TCS, Reliance, ITC, ONGC, Infosys, Coal India, HDFC Bank, Wipro, Sun Pharma, Tata Motors, HDFC, HUL, Bharti Airtel and ICICI Bank. This means that companies like SBI, NTPC, HCL Tech, Larsen & Toubro and Mahindra & Mahindra are valued less than WhatsApp.

Moreover, the major suspense has always been WhatsApp’s revenue model. As such, it never showed a money-making approach. It displays no ads and charges about a dollar for a year’s subscription, that too only on the Apple platform. All these years it was free for Android users.

I am sure the above statistics have kept everyone puzzled. Brick and Mortar companies that are over a century old and own huge prime properties, have a humongous employee base, real assets and equipments, are valued less than a 55-employee based virtual platform with no proper revenue model.

Primarily on studying the deal, I could gather insights on this crazy affair. Firstly, the $19 billion was split into $4 billion in cash and the rest in shares. Considering the fact that Facebook’s share price is at its peak, it would not have been difficult for Zuckerberg to honour WhatsApp with a 7.9% stake in Facebook Inc. 

Secondly, the key lies in a deeper look into social network's ongoing strategic shift. The Social Networking World is moving away from PCs and laptops towards mobile phones. Facebook tried to transform itself into a predominant mobile company, but failed. Its mobile app could never be as successful as the website. Zuckerberg had realized that to survive in the long-run, he had to strategically penetrate the mobile market. Hence, Facebook was comfortable paying $19 billion for a company that has no set revenue pattern, so as to get a firm grip on its mobile advertising model. It was investors' lack of confidence in this model that resulted in the social network's IPO failing in 2012. And WhatsApp being the most engaging and addictive mobile app, Facebook had no other better option to penetrate the mobile market.

Thirdly, WhatsApp has 465 million active monthly users, which is close to about 1/10^th of the Earth’s population. Valuation of such consumer-based companies is done considering its number of users. Facebook has paid approximately $42 per user and the enormous user base of WhatsApp results in the $19 billion figure.  Within the next few years, user base is expected to cross the 1 billion mark. Facebook already has 1.2 billion active monthly users, but the growth has been stagnating and eventually shrinking. Hence, by acquiring WhatsApp, they intend to monetize on the entire internet-user market worldwide.

Mark Zuckerberg at the Mobile World Congress at Barcelona said, “I actually think that by itself WhatsApp is worth more than $19 billion, although it’s hard to make that case today because they have so little revenue compared to that number.” Now with the trio of Facebook, WhatsApp and Instagram, Zuckerberg can target large number of users in almost every important country.  In announcing the deal, he declared his ambition of “connecting the world’s people”.

So, the tremendous investment in the mobile app brand indeed seems to be a crazy move by Zuckerberg. But, his vision is so robust that if he succeeds it would be a revolution. And history recalls that ‘only the crazy ones can change the world’.