Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=228222
Story Retrieval Date: 4/23/2014 2:33:20 PM CST

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Facebook is ramping up its mobile presence with the purchase of WhatsApp.


Buy or die? Facebook coughs up $19 billion for WhatsApp

by Niels Schack Norgaardand Hayat Norimine
Feb 20, 2014


Facebook Inc. continues its aggressive strategy of eliminating social competition in the mobile market.

The Menlo Park, Calif.-based company has entered into a definitive agreement to buy WhatsApp Inc., a popular mobile messaging application, for $19 billion, making it the biggest purchase in Facebook history.

The transaction is composed of three payments by Facebook: $12 billion of stock, $4 billion of cash and $3 billion in restricted stock options to retain WhatsApp employees over the next four years. WhatsApp CEO Jan Koum will join the Facebook board.

“[The price] is just kind of startling,” said Peter Kessler, an equity analyst from Standard & Poor’s. “In these cases where you’re making an investment or acquisition based on the future or opportunities, a lot of companies take these leaps of faith.”

Wall Street seems to approve, for now. Facebook shares closed at $69.63, up $1.57 or 2.31 percent compared with Wednesday’s closing price of $68.06.

Facebook’s acquisition of WhatsApp follows the company’s $1 billion investment in Instagram in April 2012, as the company’s transition to focusing on the mobile experience for users continues to dominate its purchases. Two years ago before Facebook acquired Instagram, Kessler said the social-media giant faced “significant risk” in its mobile-focused competitors.

“It’s pretty obvious that mobile’s important to Facebook,” Kessler said. “Over the last couple quarters, I think it’s fair to say they have benefited from significant investment in their mobile-related businesses.”

Facebook has faced increased pressure in previous years after apps such as Twitter, Snapchat and Instagram have snatched the younger generation of Facebook users. In an European Union-funded study last year, one of the authors, Professor Daniel Miller of University College London, wrote: “What we’ve learned from working with 16-18 year olds in the UK is that Facebook is not just on the slide, it is basically dead and buried. Mostly they feel embarrassed even to be associated with it.”

WhatsApp currently has approximately 450 million active monthly users and is adding 1 million more every day. The application allows users to message each other across mobile platforms. In June 2013, WhatsApp announced that users sent 19 billion messages per day and received 34 billion per day (due to multiple recipients per message). This is almost on par with the entire global SMS market, Facebook said in a Wednesday conference call to investors. WhatsApp has been free of charge for the first year. After that, subscriptions are 99 cents per year.

“The acquisition makes strategic sense,” said Heather Bellini, an analyst from Goldman Sachs Group Inc., in a research note Thursday. She said Facebook sees its Messenger app and WhatsApp offering different strengths to the company and WhatsApp providing a stronger text message system. “Facebook expects the combination to help accelerate growth and user engagement for both companies.”

According to a research note released Thursday by equity analysts Ralph Schackart, Ryan Domyancic and Andrew McDonald, of Chicago-based William Blair & Company LLC, the move will make Facebook an even bigger mobile powerhouse. “Facebook will have a massive and engaged mobile user base between its core product (Facebook.com and the Facebook app), Instagram, and WhatsApp,” they wrote in the research note while also pointing out that Facebook can use WhatsApp’s user data to target Facebook’s  advertisements even more accurately.

In 2012 Facebook bought the photo sharing application Instagram Inc. Prior to the purchase, Instagram was viewed as a potent threat to Facebook’s social media dominance, which prompted CEO Mark Zuckerberg to fork out $1 billion for the San Francisco startup.

The $19 billion paid for WhatsApp dwarfs the Instagram acquisition – and Schackart, Domyancic and McDonald aren’t sure whether the price is right. “While the strategic rationale makes sense, it is difficult to determine if the valuation is compelling,” the William Blair & Company analysts said. They added, however, that the price per monthly active user – $36 – is in-line with the $33 per monthly active user Facebook paid when it bought Instagram.

The ascent of WhatsApp comes with two compelling backstories. The Mountain View, Calif., company was founded in 2009 by two former Yahoo! Inc. employees, CEO Jan Koum and Brian Acton.

Koum migrated to California from Ukraine at the age of 16 with his mother, the pair on social welfare in Koum’s teenage years. He wrote on his LinkedIn profile that he “barely graduated” from Mountain View High School in 1995 and has since dropped out of his computer science studies at San Jose State University. He started working at Yahoo! in 1998 in security and operations engineering and later infrastructure engineering until 2007.

Acton earned his bachelor’s degree in computer science from Stanford University and worked at Apple and Adobe before docking at Yahoo! where he worked his way from software engineer to vice president of engineering from 1996 to 2007. He announced on his Twitter profile that he had tried to land jobs at Twitter and Facebook in 2009 but was rejected by both companies.

The same year, Acton teamed up with Koum, whom he knew from his time at Yahoo!, to launch WhatsApp. On Wednesday, standing on the doorsteps to his old welfare office in Mountain View, Calif., just a few blocks away from WhatsApp’s headquarters, Koum signed the deal – and turned himself and Acton into billionaires.