Facebook buys WhatsApp
Well, the news is a few days old already; Facebook has bought WhatsApp for $19 b which is being paid in parts: $4 b in cash, $12 b in its own stock, and an additional $3 b restricted stocks as a contingent consideration.
Well, the news is a few days old already; Facebook has bought WhatsApp for $19 b which is being paid in parts: $4 b in cash, $12 b in its own stock, and an additional $3 b restricted stocks as a contingent consideration.
The implications
There are several implications here at least from a valuation or pricing perspective:
There are several implications here at least from a valuation or pricing perspective:
As of now, Facebook's equity has a market value of $182 b, which means WhatsApp is priced about 10.5% of Facebook.
Facebook has about 1.2 b users and WhatsApp about 450 m users, which means per-user price for WhatsApp is far lower than that is for Facebook. A bargain is what Facebook might say.
At 800 m daily users of Facebook, the deal appears to be a bigger bargain.
Facebook's revenue for 2013 was $7.9 b, which gives a price-to-sales ratio (not the best ratio to use for the enterprise; let's continue to keep it simple) of 23. Here WhatsApp with revenue of $20 m (probably speculated) comes quite expensive.
How cares? Let's continue.
So far we have only tried to play some pricing games which Facebook probably considers that it has won.
The value
Facebook had operating income of $2.8 b, while I don't think WhatsApp reported any operating income. With this, any price quoted for WhatsApp would appear to be a joke.
However, Facebook must have seen something: Future profits, Growth, Control, Synergy, or Competitive advantage?
Number of users is alright; for the business to continue to exist the users have to be monetized, that is, translated into revenues, those revenues should be higher than operating costs, and finally, those operating profits should continue to grow.
We don't see that with WhatsApp, at least for now. WhatsApp apparently charges about $1 per user annually after a free usage for one year. It also has reportedly extended its one year free offer to the next year. With 450 m users now, and which seems is growing by a million by the day, all that can be seen is a lot of users, and not much cash.
Is there any other revenue stream - how about advertising? Nope, there is no chance. Here's why:
WhatsApp has not sold any ads, and it doesn't want to. We hope that it has told Facebook about this.
So little subscription revenue and none from ad revenue, how does WhatsApp survive? Who pays for its operating costs? $19 b is going to its owners not to the firm.
Reportedly, there is one other revenue stream, although a potential one, which WhatsApp can bank on. It is reported that all the messaging and chats data is being collected and stored by WhatsApp on its databases. With this it may have Google-like people's data (interests, tastes, preferences) available which can be monetized later, if not now. How much of this is legal, we don't know.
Facebook writes history
Final thoughts would be that we have not seen anything great in WhatsApp to say that it is worth $19 b. Of course, it is based on what we have seen; we do not have the ability to gaze into and predict the future; may be that's where Facebook has trumped us.
Final thoughts would be that we have not seen anything great in WhatsApp to say that it is worth $19 b. Of course, it is based on what we have seen; we do not have the ability to gaze into and predict the future; may be that's where Facebook has trumped us.
After all, it said, no one in the history of the world has done anything like that. Well, here we may want to agree.
The boardroom justification
There are stories to justify the deal, any deal for that matter.
It is also likely that Facebook must have seen something else: fear of competition. WhatsApp was only formed in 2009 with about $8.25 m capital, and in 5 years time was perceived to be good enough to threaten Facebook, the $182 b giant.
That could give one reason to the Facebook board to buy out the competition, and nip the bud. After all, Facebook has cash of $11 b, and issuing stocks is easy; that's fair game; is it?
The Appmail
Then there is a catch, like it is there everywhere: What if other Apps come forward and show the potential to threaten the Facebook-WhatsApp combination?
Sample this:
Viber was recently acquired by Rakuten for $900 m, and has plans to grow its user base to 2 b soon.
Then there could be Alibaba coming with its own App; Or there could be smarter and quicker small Apps which now have huge incentives to unleash with the hope that Facebook will be ever willing to fear them and pay for them. Sure, these are not greenmails; let's call them Appmails.
You never know, Facebook might again do something that no one in the history of the world did anything like that. After all, it has the right CEO and Chairman, and the Board to back up.
It is also likely that Facebook must have seen something else: fear of competition. WhatsApp was only formed in 2009 with about $8.25 m capital, and in 5 years time was perceived to be good enough to threaten Facebook, the $182 b giant.
That could give one reason to the Facebook board to buy out the competition, and nip the bud. After all, Facebook has cash of $11 b, and issuing stocks is easy; that's fair game; is it?
The Appmail
Then there is a catch, like it is there everywhere: What if other Apps come forward and show the potential to threaten the Facebook-WhatsApp combination?
Sample this:
Viber was recently acquired by Rakuten for $900 m, and has plans to grow its user base to 2 b soon.
Then there could be Alibaba coming with its own App; Or there could be smarter and quicker small Apps which now have huge incentives to unleash with the hope that Facebook will be ever willing to fear them and pay for them. Sure, these are not greenmails; let's call them Appmails.
You never know, Facebook might again do something that no one in the history of the world did anything like that. After all, it has the right CEO and Chairman, and the Board to back up.
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