I don’t exactly know what to make of Facebook’s acquisition of Whatsapp for about $19B . Like many others – it was a jaw bropping moment for me. And since then, I have been trying to rationalize it in my mind, with limited success.
There are some things that work in favor of this deal for sure
1. Facebook has a big inflated market cap. So it is a good time to buy someone if part of the investment is in stock.
2. What is the biggest risk for Facebook? I guess it is the scenario of growth stagnation and a loss of stickiness. On both counts , Whatsapp is THE new facebook . They would have hit a billion users one day soon with their growth rate.
3. If Facebook didn’t buy them – it is possible that Whatsapp might have ended up with a competitor like Google. In fact I cannot believe that there is no indication so far of anyone else bidding up the price for this $19B valuation to make sense.
4. Facebook is smart in looking for inorganic and risky moves to grow and keep potential competitors at bay. That is admirable for such a young company , especially one that has so many bright engineers working for it.
5. The only financing the company took was $8M from Sequoia. They got a VERY good deal – but it makes it easy for Facebook to not have to deal with a lot of deal complexity and negotiations.
6. Whatsapp shows that you can support 450 Million users with 32 engineers. I don’t know any enterprises or consumer companies who have that kind of ratio. It is unheard of – and something Facebook can hopefully learn from as they grow.
There are also some things I don’t quite like about the deal
1. Historically, there are many such big acquisitions that have not worked out quite well for the acquiring company – like Microsoft buying Skype for about $8B or so. And skype does have a model to make real revenue unlike Whatsapp
2. Facebook doesn’t make revenue to match its market cap. How exactly does adding a very pricey Whatsapp that makes very little money on top make economic sense beats me. Especially since the impression is that Whatsapp will continue to not get into monetization via advertisements.
3. How much of competition can Facebook buyout ? at some point – it gets very expensive, and the share dilution for Mr.Z might not make it attractive .
4. What is the rationale behind this valuation? Will more low revenue startups now use this to convince the market of higher valuation? Will be constantly be jumping from one bubble to another ?
In general , I am none the wiser. But of course what I think doesn’t matter – it is Facebook’s money – they can do whatever they please 🙂