Menu
Clone of Alibaba (BABA) IPO Shares Jump 36%

Alibaba (BABA) IPO Shares Jump 36%

The Sexiest Halloween Costumes of 2014

The Sexiest Halloween Costumes of 2014

Mazda Miata 2016 model revealed

Mazda Miata 2016 model revealed

Miley Cyrus New Butt Gets in Trouble with Law

Miley Cyrus New Butt Gets in Trouble with Law

Larry Ellison Steps Down as CEO of Oracle

Larry Ellison Steps Down as CEO of Oracle

Quick Take: What's Up with Facebook's WhatsApp Deal?

Feb 28 2014, 1:56pm CST | by , in News | Technology News

Quick Take: What's Up with Facebook's WhatsApp Deal?
 
 

YouTube Videos Comments

Full Story

Quick Take: What's Up with Facebook's WhatsApp Deal?

This article was originally posted on the Knowledge@Wharton website on February 21, 2014.

Can a text messaging service have the same value as a company that produces life-saving cancer drugs? According to Facebook, the answer is yes. When the firm announced on Wednesday that it is purchasing Mountain View, Calif.-based WhatsApp for $19 billion — $16 billion in cash and stock, and $3 billion in restricted stock units — an article in  Bloomberg noted that such valuations have only ever been given to firms that develop drugs for illnesses such as cancer and Crohn’s disease.

WhatsApp enables users to create profiles to share text messages, photos and videos over their smartphones. With 450 million monthly users, the service is expanding rapidly in Africa, Asia and Latin America. The WhatsApp acquisition would give Facebook a much needed foothold in emerging markets, where its presence is lacking, analysts say.

Currently, WhatsApp’s service is free for the first year, and then $1 for each year thereafter. In a statement following Wednesday’s announcement, Facebook founder and CEO Mark Zuckerberg said that WhatsApp is “on a path to connect one billion people” within the next few years. At the current fee, that could eventually mean $1 billion in annual sales for Facebook,Bloomberg noted. (In a previous Knowledge@Wharton story, Wharton faculty warned that Facebook inevitably will need to find revenue streams beyond advertising in order to avoid alienating users.)

“WhatsApp is the only widely used app we’ve ever seen that has more engagement and a higher percentage of people using it daily than Facebook itself,” Zuckerberg added. (According to  CNET, the engagement rate of WhatsApp’s monthly users on a daily basis is 70%, whereas Facebook’s is around 61%.) Given the potential upsides, however, does the deal make sense at such a steep price? Knowledge@Wharton asked two Wharton experts —Kartik Hosanagar, professor of operations and information management, and Lawrence G. Hrebiniak, emeritus professor of management — whether they believe the move ultimately will pay off.

Kartik Hosanagar:

“For Facebook, the acquisition makes sense for several strategic reasons, which I outline below. The valuation is hard to justify from a purely financial standpoint. In my opinion, the valuation reflects [the fact] that … Facebook was willing to pay whatever was needed to keep WhatsApp away from competitors such as Google. Secondly, Facebook has been aggressive in identifying the next big trends and startups in social [media] and trying to acquire those companies before they can eventually become serious threats to Facebook — for example, Instagram. So, Facebook paid a premium to bring a potential long-term threat in-house. So, to me, the valuation was less about financial upside but reflected a nice defensive move by Facebook.

“Now, why did acquiring WhatsApp make sense in the first place? One reason is opportunities: Growth for Facebook is going to come from emerging markets, where WhatsApp is very strong. Messaging is important for Facebook, and it has invested a lot in its standalone messenger app. Further, WhatsApp comes with [an existing] revenue model, which I suspect Facebook will not toy around with.

“There is another trend worth noting here. For a while now, Facebook has acknowledged that a one-size-fits-all Facebook doesn’t make sense going forward. People want to share different types of content with different users. There are several use cases for which Facebook is not ideal, and that creates an opening for an entrant to come in and take over the social networking space. This is especially true in mobile and, in response, Facebook has built separate apps for separate use cases (as opposed to those use cases that are features within Facebook). For example, Facebook launched Facebook Camera, and later acquired Instagram when the Camera app did not take off. It also launched Poke [a pared-down form of instant messaging], and then made an offer to acquire SnapChat when Poke failed. [Recently, the company] launched Paper, an app for news. [It also] launched its standalone messenger app. Now, it has acquired WhatsApp.”

Lawrence G. Hrebiniak:

“Facebook is paying $19 billion for a messaging company with 55 employees — a cost of approximately $345 million per employee. They must be really special and talented! The firm is buying a company with [minimal] revenue and one that has eschewed an advertising-revenue model…. Is the hot messaging technology worth such a huge amount? Is this a good move or a form of insanity? Let’s consider a few facts or motives.

“Facebook’s growth has slowed, and WhatsApp is growing — which speaks positively for the acquisition. Both of the companies are in the same business [social networking], but the communication methods or technologies are different, so Facebook is adding some new capabilities — which, again, is good. Facebook may also be trying to limit competitors’ options — for example, making a first move to keep Google and others from getting into their competitive space.

“I’m still not convinced, however, about the logic of the deal. What is the projected business model for the combined companies? Will monetization or revenue generation become a reality? Is it worth $19 billion to keep Facebook relevant and fresh in the market? $19 billion is roughly a third of Ford Motor Company’s and HP’s market cap — is this reasonable, or is the bubble inflating? There may be a strategy here, but it eludes me at the moment. The price seems way overboard, especially when put in the context of other acquisitions in the communications arena. I wish Facebook luck, but this feels like a dumbfounding deal that looks overpriced and risky.”

Source: Forbes

 

You Might Also Like

Updates


Sponsored Update


Advertisement


More From the Web

Shopping Deals

 
 
 

<a href="/latest_stories/all/all/31" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

 

Comments

blog comments powered by Disqus

Latest stories

Donald Trump to reconsider the Renovation of Atlantic City
Donald Trump to reconsider the Renovation of Atlantic City
The rich and famous businessman, Donald Trump has said that he will reconsider the renovation of Atlantic City. It sure has broken down since he left it more than half a decade ago.
 
 
Apple to unveil new iPads
Apple to unveil new iPads
Apple will also launch its operating system on Oct. 21
 
 
Brittany Kerr and Jason Aldean: Is the Affair still on?
Brittany Kerr and Jason Aldean: Is the Affair still on?
As far as the affair between Brittany Kerr and Jason Aldean is concerned, the proper question to ask would be: is it still on?
 
 
Taylor Swift kicks off the iHeartRadio Music Festival
Taylor Swift kicks off the iHeartRadio Music Festival
The singer stole millions of hearts while flashing her midriff in TWO striking ensembles
 
 
 

About the Geek Mind

The “geek mind” is concerned with more than just the latest iPhone rumors, or which company will win the gaming console wars. I4U is concerned with more than just the latest photo shoot or other celebrity gossip.

The “geek mind” is concerned with life, in all its different forms and facets. The geek mind wants to know about societal and financial issues, both abroad and at home. If a Fortune 500 decides to raise their minimum wage, or any high priority news, the geek mind wants to know. The geek mind wants to know the top teams in the National Football League, or who’s likely to win the NBA Finals this coming year. The geek mind wants to know who the hottest new models are, or whether the newest blockbuster movie is worth seeing. The geek mind wants to know. The geek mind wants—needs—knowledge.

Read more about The Geek Mind.