Facebook is buying WhatsApp for in total USD 19 billion. The price includes USD 4 billion cash and the remainder in stock. This gives WhatsApp owners and employees 7.9 percent of Facebook, of which 20 percent will be paid out within four years of completing the deal as a retention bonus for staff. The base price for the company is USD 16 billion, of which USD 4 billion in cash. In the event the deal does not get regulatory approval, Facebook agreed to pay WhatsApp a break-up fee of USD 2 billion, half in cash.
The takeover price is without a doubt high, but whether it's too high, is not yet clear. The acquisition is about mainly three factors: the network effect, monetisation and of course, strategy.
WhatsApp can clearly be considered an internet winner, the same as Google, YouTube, Amazon, LinkedIn, Twitter or Facebook itself. That kind of milestone can't be underestimated. Few companies or services have been able to reach this kind of scale and profit successfully from the network effect. WhatsApp notes as well that in it's entire existence it has never spent a penny on marketing.
In this kind of world, monetisation comes second. For WhatsApp users, this means the looming possibility of paying an annual fee for the app, but the company has increasingly waived this as it focuses on gaining more scale. Facebook CEO Mark Zuckerberg expect that WhatsApp is on its way to 1 billion users. Until then the company will continue with start-up losses. What's most important is that monetisation is introduced as subtly as possible, in order to avoid frustrating users. This means also keeping WhatsApp free of advertising. Myspace was a victim of the greediness of its new owner (News Corp), driven to make money from the site. YouTube and Facebook also need to watch out that the user experience isn't disrupted with too much advertising, as users who walk away don't come back easily.
Apart from that, one needs to have faith that WhatsApp will eventually be able to generate revenues. In addition to the annual fee, this may include various forms of advertising (similar to YouTube), sponsoring (eg Twitter) and in-app payments, for example for stickers (see Line). Undoubtedly more opportunities will emerge in future.
And finally, the strategy. An internet winner is not just "priceless" but it also provides diversification. With the takeover of Instagram (April 2012, USD 1 billion in cash and shares), Facebook was able to hold on to some users who otherwise may have been abandoning the social network in favour of more time on Instagram (or Tumblr, Pinterest, Snapchat . . . ). There is also the argument that by buying WhatsApp, Facebook keeps the company out of the hands of for example Google, Microsoft, Rakuten (which bought Viber) or even a telecom operator such as Vodafone. Or Orange, which in January 2013 launched Orange Horizons in order "to seek out new business opportunities in countries where the Group is not already present as a mass-market telecommunications provider."
The only question remaining is who's next? This could include any number of companies, such as Spotify, Pinterest, Snapchat, Foursquare, Airbnb, Square, Dropbox, Evernote, SoundCloud or Flipboard. Who will be a winner? Which internet company makes a good fit? Or could telecom operators start making a move in the M&A frenzy? It wouldn't be the first time, after smaller deals such as Orange buying Deezer and Telefonica acquiring Jajah.
