Facebook will buy fast-growing mobile-messaging startup WhatsApp for US$19 billion in cash and stock in a landmark deal that places the world’s largest social network closer to the heart of mobile communications and may bring younger users into the fold.
The transaction involves US$4 billion in cash, US$12 billion in stock and US$3 billion in restricted stock that vests over several years.
The WhatsApp deal is worth more than Facebook raised in its own initial public offering and underscores the social network’s determination to win the market for messaging.
Founded by a Ukrainian immigrant who dropped out of college, Jan Koum, and a Stanford alumnus, Brian Acton, WhatsApp is a Silicon Valley start-up fairy tale, rocketing to 450 million users in five years and adding another million daily.
“No one in the history of the world has ever done something like this,” Facebook chief executive Mark Zuckerberg said on a conference call on Wednesday.
Zuckerberg, who famously closed a US$1 billion deal to buy photo-sharing service Instagram over a weekend in mid-2012, revealed on Wednesday that he proposed the tie-up over dinner with WhatsApp chief executive Koum just 10 days earlier, on the night of February 9.
WhatsApp is the leader among a wave of smartphone-based messaging apps that are now sweeping across North America, Asia and Europe.
Although WhatsApp has adhered strictly to its core functionality of mimicking texting, other apps, such as Line in Japan or Tencent’s WeChat, offer games or even e-commerce on top of their popular messaging features.
The deal provides Facebook with an entree to new users, including teens who eschew the mainstream social networks but prefer WhatsApp and its rivals, which have exploded in size as private messaging takes off.
“People are calling them ‘Facebook Nevers,’” said Jeremy Liew, a partner at Lightspeed and an early investor in Snapchat, another red-hot messaging company that flirted a year ago with a multibillion-dollar acquisition offer from Facebook.
How WhatsApp’s service will pay for itself is not yet clear. Zuckerberg and Koum did not say how the company would make money beyond a US$1 annual fee, which is not charged for the first year. They said WhatsApp will continue to operate independently, and promised to continue its policy of no advertising.
“Communication is the one thing that you have to use daily, and it has a strong network effect,” said Jonathan Teo, another early investor in Snapchat.
“Facebook is more about content and has not yet fully figured out communication.”
Many were surprised at the price tag.
Facebook is paying US$42 per user with the deal, dwarfing the US$33 per user it paid to acquire Instagram. By comparison, Japanese e-commerce giant Rakuten just bought messaging service Viber for US$3 per user, in a US$900 million deal.
Rick Summer, an analyst with Morningstar, warned that while investors may welcome the addition of such a high-growth asset, it may point to an inherent weakness in the social networking company, where growth has slowed in recent quarters.
“This is a tacit admission that Facebook can’t do things that other networks are doing,” Summer said, pointing to the fact that Facebook had photo-sharing and messaging before it bought Instagram and WhatsApp.
“They can’t replicate what other companies are doing, so they go out and buy them. That’s not all together encouraging, necessarily, and I think this won’t be the last [deal of its kind], and that is something for investors to consider.”
“Goodness gracious, it’s a good deal for WhatsApp,” Teo said.
Facebook pledged a break-up fee of US$1 billion in cash and US$1 billion in stock if the deal falls through.
Shares in Facebook slid 2.5 per cent to US$66.36 after hours from a close of US$68.06 on the Nasdaq.
“No matter how you look at it, this is an expensive deal and a very big bet, and very big bets either work out or they perform quite poorly,” Summer said.