The biggest news that hit the online media today was the acquisition of the popular messaging service “Whatsapp” by the leading social network platform Facebook. The deal, which is currently quoted as $19 bn, involves $4 billion cash payment to Whatsapp and $12 billion dollar approximately worth of class A Facebook Common stock. An addition $ 3 billion in restricted stock units will be granted to Whatsapp that will vest over four years subsequent to closing.
Those who are not aware of the popular messaging service Whatsapp are bound to wonder what made them so valuable to Facebook. Whatsapp has seen a tremendous growth in its user base, since its inception in 2009 it has reached an active user base of 450 million. And according to the Facebook blog, they are on a path to connect 1 billion people.
Whatsapp was founded by Jan Koum and Brian Acton who wanted to create and be devoted to a clean, light and fast communication service which works without much hassle. It is a testament to their dedication that while their competitors tried to monetize their services by featuring games, ads and promotions, Whatsapp remained committed to their “No Ads! No Games! No Gimmicks!” policy.
Why is this deal important to Facebook?
As per the information provided on their blog :
“The acquisition supports Facebook and WhatsApp’s shared mission to bring more connectivity and utility to the world by delivering core internet services efficiently and affordably. The combination will help accelerate growth and user engagement across both companies.”
The above figure shows the reach of Whatsapp and Facebook as mobile messengers vis-a-vis similar services around the world.
The valuation of Social network business is largely driven by user base and Facebook has been leading the business with around 1 billion users worldwide. Such is the rush for active user base that this deal is also viewed as $42 that Facebook has paid to acquire each current user of Whatsapp. What’s more, this acquisition comes close at the heal of another buyout of the popular photo sharing application Instagram for which it paid $1 billion. It is speculated that Facebook is uncertain of the younger and evolving user who are shifting to mobile from the desktop and wants to guard its position in this emerging space as well. The world of social networks is also not entirely predictable. Orkut and MySpace, two popular and huge social networks were almost completely annihilated with the emergence of Facebook and Facebook will do well to realize that the same can occur to them. It is also important to guard themselves from other behemoths such as Googla and Microsoft who will be ready to strike where Facebook becomes vulnerable.
Financial and Strategic analysis of the deal.
The financing method of M&A can be broadly classified as Cash deal or Share Swap. In case of an acquisition, the former involves complete buyout of the shares, and therefore control, of the acquired firm by the acquirer while the latter is in the form of issue of the company share at a given ratio proportional of the latter. A cash deal results in the risk being completely absorbed by the acquirer, as a devaluation of its stock will only affect the acquirer’s company, while a share swap results in the risk being shared by both the parties. Rarely do we see a pure cash or a pure stock swap deal in the acquisition (share swap occurs in mergers and cannot be termed as acquisitions). The current deal is also a mix of cash and a share swap. As mentioned in the blog :
“Upon closing of the deal, all outstanding shares of WhatsApp capital stock and options to purchase WhatsApp capital stock will be cancelled in exchange for $4 billion in cash and 183,865,778 shares of Facebook Class A common stock (worth $12 billion based on the average closing price of the six trading days preceding February 18, 2014 of $65.2650 per share). In addition, upon closing, Facebook will grant 45,966,444 restricted stock units to WhatsApp employees (worth $3 billion based on the average closing price of the six trading days preceding February 18, 2014 of $65.2650 per share). As of February 17, 2014, Facebook had 2,551,654,996 Class A and B shares outstanding plus approximately 139 million dilutive securities primarily consisting of unvested RSUs. The Class A common stock and RSUs issued to WhatsApp shareholders and employees upon closing will represent 7.9% of Facebook shares based on current shares and RSUs outstanding. “
It is interesting to note that this deal has been heavily financed through a share sale of Facebook as it is already considered as overvalued by many. However, this doesn’t mean that it’s a sour deal for whatsapp as with their current user base they would have been probably valued at $ 3-4 billion. Let us examine the pros and cons of this merger :
1) Facebook is known to promote an entrepreneurship culture in their company and the founders of whatsapp, who will be joining Facebook’s Board of Directors, and its employees may feel right at home with Facebook
2) As mentioned by Mark Zuckerberg in his Facebook post “WhatsApp will continue to operate independently within Facebook. The product roadmap will remain unchanged and the team is going to stay in Mountain View. Over the next few years, we’re going to work hard to help WhatsApp grow and connect the whole world.” https://www.facebook.com/zuck/posts/10101272463589561?stream_ref=10
3) There is synergy in their field and together they can work towards generating more value for user and hence grow their user base further
4) Instagram, another acquisition by Facebook, has done considerably well even after acquisition.
1) The philosophies of these two entities are not exactly in sync. Whatsapp has insisted in not intruding into the privacy of its user while Facebook is not exactly popular for its user-privacy setting and is also not averse to monetizing their user base through ads.
2) It may give signal to the investors that Facebook has run out of ideas to grow user base organically and is trying to compensate by acquiring them through buyouts which is not a sustainable strategy.
3) While Facebook has increased its global reach by acquiring Whatsapp, it is yet to make any dent in the world’s biggest and growing mobile market – China. Does this leave opportunity for another big player to exploit?
Acquisitions are exciting but tricky. We have already mentioned how mergers and acquisitions can go wrong. This is one of the biggest acquisition news in 2014 (still not as big as the Comcast deal) and it remains to be seen how this plays out in future. Please let us know your view on this acquisition in our blog comments.