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Facebook buys WhatsApp

Ken Brown, MBA Programme Director

Faculty Blog

Facebook has just bought WhatsApp for $19bn.

-          So what, what’s WhatsApp anyway?

It’s a messaging service over all mobile phone networks, which is essentially free for users, so they don’t need to pay for text messages, pictures or videos.

-          So why is Facebook paying $19bn for something that is given away for free? It doesn’t make any sense to me.

Well it won’t always be free.  Facebook will plaster it with ads targeted at each user, which is what marketers want.

-          How can they do that?

Well they have huge amounts of information on users, built up from monitoring the day to day use of mobile phone users.  So marketers will be willing to pay shed loads of money for that access to potential customers.

-          How many people are we talking about?

WhatsApp currently has 450m users and is growing like mad just now.  They should hit a billion in no time at all.


-          Couldn’t Facebook just copy WhatsApp and not need to pay $19bn for them?

They tried this, but the Facebook Messenger service was not enough on its own.  They had to buy WhatsApp, because if they didn’t Google would have bought it and that would have put Google way out in front in this technology arms race.  Same idea as with Instagram, Facebook had to get in there and buy it before someone else did.  This deal makes the $1bn they paid for Instagram look like chicken feed and the Instagram deal looks pretty smart now.

-          So what do Facebook get for their $19bn?

That $19bn could well be an outstanding bargain.  WhatsApp have got 50 employees, so they will become Facebook workers now (that works out at just under $400m per employee).  They will get a business that is growing fast and users are expected to pay 99 cents per year to use it, so hopefully that will chip in some cash to offset the $19bn.  And the Facebook guys have got to work out a way of sneaking the ads on to WhatsApp without the users deserting in droves.  Oh, I almost forgot, 20 billion messages a day are sent over WhatsApp.

-          Can Facebook afford to pay $19bn for this little company?

Yes, it’s a drop in the ocean for Facebook and besides they are not paying in real money, they are kind of using funny money – they are paying for most of it with their own shares - $4bn in cash and $15bn in Facebook shares.

-          How can they do that?  It’s not the same thing as money, is it?

Well lots of people are prepared to accept Facebook shares instead of cash, because they think that at the current time Facebook shares are better than cash.  Over the past year and a half Facebook shares have risen from around $17 to $70.  The sellers of WhatsApp are hoping that will continue (as they will become Facebook shareholders), after all if I had left $17 on my desk a year and a half ago, it would still be worth $17 today.  That makes Facebook shares a lot more attractive than dollars in cash.

Facebook together with Google and Apple look like they will dominate the internet going forward.  It is getting to the stage where these are the only companies that will have the scale to keep adding services (by paying the very high asking prices for target companies) to their offerings.  While this arms race is on, Facebook and Google will use their sky high valuations (Facebook price earnings ratio = 106, Google P/E ratio = 33.4) to buy up companies.  Apple shares only trade on a 13.5 times price earnings ratio, so they have to sell relatively more shares than the other two to raise a set amount of money.  Looking at the ad revenues generated on mobile internet (see table below), Google and Facebook currently capture nearly 70% of global market share.  That power looks hard to dislodge.

-          Facebook looks overvalued, what if their shares stop going up?

That’s the risk you take.  Nobody is forcing you to buy into the stock market, you take the risk you might get the return.  You don’t take the risk you don’t get the return.  Just one thought to leave you with, whatever happened to MySpace?