Why The Whatsapp Acquisition Was A Great Deal For Facebook

It’s All About Relativity

Goals

To justify the valuation of Whatsapp in relation to the current valuation of Facebook

The major question this post is trying to answer revolves around whether or not Facebook was actually crazy for purchasing Whatsapp for $19 billion (Breakdown: $4 billion in cash, $15 billion in FB shares and RSUs) given Facebook’s current $174 billion valuation.

Non-Goals

Speculation regarding the possibility that silicon valley as a whole might currently be experiencing valuation ‘bubble’

It is not a goal of this post to address the possibility that Silicon Valley might be in a valuation bubble, that is a much bigger discussion that would need to be addressed under a separate heading.

Of course, for such a discussion about valuation bubbles to be fair and complete, it cannot single out Whatsapp as a scapegoat for all the perceived sins of the valley, it would need to more generally evaluate the valuations of other multi-billion dollar tech companies including Facebook ($174 billion +), Netflix ($25 billion +), Google ($400 billion +), LinkedIn ($23 billion +), Twitter ($30 billion +), Dropbox ($10 billion +) etc.

One thing that most posts about the Whatsapp acquisition completely omitted was the fact that although the overall acquisition sum for Whatsapp was $19 billion, only about $4 billion of that is expected to be paid out immediately in cash, the other $15 billion is tied directly to Facebook’s valuation in the form of shares and RSUs. RSUs typically have a one year ‘cliff’ during which holders cannot sell any stock for cash, and this cliff is usually followed by a more gradual vesting that typically occurs over a 4 year vesting schedule.

So what does this mean?

It means that if Facebook’s valuation falls to a quarter of its current value in a month, the Whatsapp acquisition valuation would be effectively down to:

$4 billion + (1/4) * $15 billion = $7.75 billion

A more general equation would be the following:

Where,

r = % change in Facebook’s valuation

Whatsapp Valuation = $4 billion + ((100+r)/100) * $15 billion

• NB: r will be negative if Facebook’s valuation drops*
• NB: This is not necessarily a complete equation, in fact this is a very simplistic equation, as it does not factor in future dilution events, among other unpredictable things could affect the valuation in the long run. The goal is to emphasize the point that the dollar value of this acquisition was not the most important factor for Facebook

Given the above, any commentary on the cost of Whatsapp to Facebook is incomplete without doing a relative comparison to Facebook current value. The numbers guys at Facebook were convinced that Whatsapp was worth $4 billion + ~9% of Facebook, and they were smart enough actually tie the majority of the acquisition dollars to Facebook’s market cap.

So the most important question should not be whether Whatsapp is worth $19 billion, as this number is mostly a variable; I have no idea whether Whatsapp is worth $19 billion or whether Facebook is worth $174 billion, time and the markets will tell.

The key question everyone should be asking should be whether Whatsapp is worth ~9%+ of Facebook. I was also asking all the wrong questions till I got some time to take in all the facts.

Here’s why Whatsapp might be worth a lot more that 9% of Facebook.

The ratio of Whatsapp’s MAUs to Facebook’s MAUs is 1:3 and Whatapp’s MAUs are more active than Facebook’s MAUs

Whatsapp has 450 million MAUs (monthly active users) while Facebook has 1.25 billion MAUs. More interesting than the fact that Whatsapp has a user base more than a third of the size of Facebook’s, is the fact that 70% of Whatsapp’s users use the application daily. This is rare, if not unheard of. In comparison, Facebook has only about 61% of its MAUs returning daily and Twitter (valued at $30+ billion) has only about 45% of its 218 million MAUs returning daily.

Whatsapp is growing much faster than FB has ever grown

Whatsapp has been adding about 1 million new users daily, in comparison Facebook adds about 400-500 thousand new users daily and Twitter adds a dwarfish 100 thousand users daily .

If it continues at this rate, Whatsapp is on track to hitting the 1 billion mark in 2015, in comparison it took Facebook close to 9 years to hit the 1 billion MAU mark.

Whatsapp is bigger than SMS

Whatsapp’s messaging volume is HUGE.

Whatsapp processes 36 billion outbound messages and 18 billion inbound messages daily versus 17.6 billion SMS messages sent across all mobile carriers worldwide.

Again this is HUGE.

Whatsapp has been around for 5 years, SMS has been around for decades. Whatsapp is disrupting the $120+ billion a year SMS space for Telcos worldwide as it blurs international and transcontinental communication lines at a huge discount.

Facebook now owns 4 of the 10 most popular mobile apps

Facebook understands the history of the internet and has learnt from mistakes of incumbents past

Remember when Microsoft underestimated the power of the internet and Yahoo became king, then Microsoft scrambled to catch up but failed?

Remember when Yahoo underestimated search and Google became the king of search, then Yahoo scrambled to catch up but failed?

Remember when Google underestimated social and Facebook became the king of social, then Google scrambled to catch up using Google+ but failed?

Facebook doesn’t want a “remember when Facebook underestimated OTT mobile messaging …”.

Facebook probably knows that giving up 9% of its market cap for a company that most reminds it of itself a few years back is not a reckless risk. I’m sure Yahoo wishes it had exchanged 9% of its market cap in shares and RSUs for Google back when it still had the chance to do so 10+ years ago.

Fun afterthought: Remember this CNN article from 2006? Excerpt below…

Rumor has it that MySpace competitor Facebook has been looking to sell out and allegedly turned down a $750 million buyout offer. Management’s supposed asking price? $2 billion.

If a big media company is willing to buy Facebook, which doesn’t have the traffic of MySpace, for more than three times the price of Intermix, then that would be the surest sign yet that media companies are hopeless suckers. Heck, even a $750 million price tag may be too much.

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