Facebook is buying WhatsApp for a massive $19bn (£11.4bn), as the social network looks to restart its flagging growth in developed markets, while offering a popular free messaging service in emerging markets, shaking up the telecoms industry in the process.
The purchase marks the largest single acquisition in Facebook’s 10-year history, 19 times bigger than its $1bn purchase of photo app Instagram back in 2012. Facebook was also rumoured to have made a $3bn bid for rival messaging firm Snapchat last year.
The WhatsApp deal is equal to about 9%of Facebook’s current market value. In comparison, Google’s biggest deal, Motorola Mobility, stood at $12.5bn, while Microsoft’s largest was Skype at $8.5bn and Yahoo bought Tumblr last year for $1.1bn. Interestingly, Apple has never done a deal above $1bn.
The move has led many to question the value of the deal and Facebook’s confidence in its own growth, with shares in the social network dropping 5% in after-hours trading yesterday before recovering slightly.
However, the benefits of the deal could go beyond simply more users and advertising revenue, as WhatsApp has the potential to take billions from the telecom industry as users opt to use chat apps rather than send costly test and picture messages.
It’s estimated that over 450 million people are using WhatsApp worldwide today, of which 70% are active, adding another million users per day and quickly approaching the entire volume of carrier-based SMS worldwide.
Maintaining an independent brand
WhatsApp will “continue to operate independently and retain its brand” despite the acquisition, Facebook said.
Founded by a Ukrainian immigrant who dropped out of college, Jan Koum, and a Stanford alumnus, Brian Acton, WhatsApp has become a Silicon Valley success story.
“I’ve known (WhatsApp CEO) Jan (Koum) for a long time and I’m excited to partner with him and his team to make the world more open and connected.”
He added that the service “doesn’t get as much attention in the US as it deserves because its community started off growing in Europe, India and Latin America. But WhatsApp is a very important and valuable worldwide communication network. In fact, WhatsApp is the only widely used app we’ve ever seen that has more engagement and a higher percent of people using it daily than Facebook itself.”
The acquisition will also see Koum – a former Yahoo! engineer – join Facebook’s board of directors.
“WhatsApp’s extremely high user engagement and rapid growth are driven by the simple, powerful and instantaneous messaging capabilities we provide,” Koum said. “We’re excited and honoured to partner with Mark and Facebook as we continue to bring our product to more people around the world.”
Facebook said in a statement that it would pay $4bn (£2.4bn) in cash and $15bn (£9bn) in company shares as part of the deal.
The app’s founders and employees will get $3bn (£1.8bn) of the shares as restricted stock that will vest over four years after the deal closes.
“WhatsApp is on a path to connect one billion people. The services that reach that milestone are all incredibly valuable,” Facebook CEO Mark Zuckerberg said. “I’ve known (WhatsApp founder) Jan (Koum) for a long time and I’m excited to partner with him and his team to make the world more open and connected.”
Commenting on the deal, Danny Meadows-Klue, Chief Executive, Digital Strategy Consulting group, said: “Facebook’s $19bn deal to buy WhatsApp is a staggering amount from a company that clearly doesn’t want to risk another Twitter. This is the price of insurance when you are playing to own the gateway to the web.”
Five key reasons for Facebook’s $19bn gamble
Buying back growth after stalling in Western markets
WhatsApp is simply growing faster that Facebook. The chat app market has exploded, and WhatsApp is leading the way ahead of Snapchat, WeChat and many others. Facebook users are currently uploading 350 million new photos every day. Those numbers do not include photo uploads to Instagram, another mobile app that Facebook acquired. By contrast, WhatsApp is processing 500 million images per day. The deal shows Facebook’s intention to remain the most ‘engaged with brand in the world’, even if that means offering billions of dollars for an app that’s less than a few years old. This in turn should keep advertisers, and their revenues, flooding in. The combined Facebook, Instagram and WhatsApp audience will bring Zuckerberg close to 2 billion active users- nearly one third of the world’s population.
A defensive move- buying WhatsApp so Google and Yahoo could not
The move could also be a pragmatic way of keeping rivals such as Google and Yahoo away from the biggest growth areas. When the first reports surfaced that Facebook wanted to buy Snapchat back in 2013, several other rumours circulated that Yahoo and Google wanted to buy Snapchat. It is very likely both had similar plans for WhatsApp- so the huge price tag is not just for Facebook’s growth, but for preventing big rivals from doing the same.
Continuing its ‘mobile first’ strategy with early adopting teens
Facebook has admitted there has been a decrease in daily users, “specifically among teens”- the teen audience was a key factor in its 2012 purchase of Instagram. Teens are no longer sitting at their computers, instead choosing to download messaging apps like Snapchat and sending brief selfies to friends. Facebook needs to bring back some of the teens that abandoned its website for other services. If it can’t attract them with new in-house ‘multi-app’ strategy (such as Facebook Paper), it’ll buy popular rival apps such as WhatsApp. From this perspective, a $19bn spend to attract its next billion users while keeping its existing 1.23 billion members, including teenagers, interested could actually make sense.
Expanding where the biggest growth is- in emerging markets
WhatsApp is actually more popular than Facebook in emerging markets, with mobile users in India, Brazil, and Mexico found to be more likely to use WhatsApp than Facebook for their messaging needs, according to recent research. Now Facebook has the ability to grow and maintain a strong mobile presence outside of the US.
It not about extra eyeballs for ads- it’s about becoming the future of mainstream communication
Plenty of other such apps have sprung up, including Viber, which Rakuten, a Japanese internet giant, recently bought for $900m, and the immensely popular WeChat, which belongs to Tencent, an innovative Chinese company. But WhatsApp has lead the way for this new generation of chat apps- and telecoms companies are terrified. In 2013, the number of text messages sent in the UK fell for the first time ever. According to figures published by Deloitte in a telecom prediction survey, the number of texts sent last year fell 7bn to 145bn, while the number of instant messages sent through apps rose to 160bn. We have reached a tipping point. But the usage of mobile phones to send messages is stronger than ever- and WhatsApp signals the future. The report predicts that in 2014 the number of texts sent will fall even further to only 140bn, while the number of instant messages will increase dramatically to around 300bn. The price of the technology also means that soon mobile phone companies will stop making traditional handsets, and people will have no choice but to convert to smartphones.
Watch this video from Bloomberg discussing the deal here:
Read the blog annoucement here
