The steep price is an indication of “the lengths to which Facebook’s co-founder and chief executive, Mark Zuckerberg, will go to protect his company’s turf as the dominant social network on the web, and is sure to fuel the debate on whether consumer Internet companies are overvalued,” the NYT explained in its article.
Facebook, which is based in Menlo Park, Calif., will reportedly pay $4 billion in cash and $12 billion worth of shares for the WhatsApp application. But the total cost of the deal could rise to $19 billion, according to the NYT, “with WhatsApp employees and founders receiving an additional $3 billion in restricted stock units, which would vest over the next four years.”
The WhatsApp service is widely used internationally but is less known in the U.S. WhatsApp doesn’t sell advertising and has little revenue, the NYT reported. Users of the service are charged a flat fee of $1 a year, plus the first year of service is free.
The purchase price looms far larger than the $1 billion Facebook paid for Instagram, the photo-sharing service Facebook purchased in 2012.
“Facebook is constantly working to not lose anybody,” said Nate Elliott, an analyst with Forrester Research, told the NYT. “Sometimes that is them innovating on their own, sometimes that’s them mimicking competitors, and sometimes that’s them buying competitors.”
And, the NYT explained, “The acquisition also reflects a new strategy at Facebook: The company intends to acquire or build a family of applications instead of simply buttressing its core social network.
“Now a 10-year-old social network with 1.2 billion users globally, Facebook has become so ubiquitous in many countries that it risks losing some of the attention of users.”
In buying WhatsApp, which is reported to be exploding at a faster growth rate than that of its rival Twitter. With this latest acquisition, Facebook is gaining access to customers who prefer communicating one-on-one or with very small groups rather than sharing information more widely.
According to the NYT, Facebook is justifying the price of this deal by citing WhatsApp’s startling growth, which is even faster than Facebook’s own growth in its infancy. On a conference call with analysts, David Ebersman, Facebook’s chief financial officer, compared WhatsApp to companies with the potential to grow to 1 billion users.
“The primary thing we focused on was how healthy this network is and the pace at which it was growing,” he said. “We looked at other networks that have achieved those kinds of scale” and that helped provide a framework, Mr. Ebersman said.
In the announcement on Facebook’s website, the company said that WhatsApp’s messaging volume is now approaching the entire volume of all text messages sent globally. Based on global estimates, that number could be as high as seven trillion messages sent on WhatsApp a year.
In the conference call, Jan Koum, WhatsApp’s co-founder and chief executive, played down the idea of putting ads on WhatsApp and said he was satisfied with its current subscription model.
“Monetization is not going to be a priority for us,” Koum said.
The two companies have held informal talks for two years, the NYT reported, but the deal came together quickly. Zuckerberg first reached out to Koum in the spring of 2012. The two met at a California coffee shop.
“Later that year, they began a series of dinners, and continued to discuss messaging and communication services during meals and walks in the hills above Silicon Valley,” the NYT reported.
“By some metrics, the cash and stock being paid for WhatsApp make it among the richest deals of all time. With 55 employees, WhatsApp is commanding a price equivalent to $344 million an employee, or about $28 a user. And it is the largest acquisition ever of a venture capital-backed start-up, according to Dow Jones VentureSource,” the NYT added.
Facebook had $7.9 billion in revenue last year, most of it from advertising.