The relationship between Facebook and WhatsApp started in the spring 2012 over coffee at a German bakery. It was consummated on Valentine’s Day with chocolate-covered strawberries, after just five days of talks.
Facebook, the world’s largest online social network, agreed to acquire mobile-messaging start-up WhatsApp for as much as US$19 billion in cash and stock, as it seeks to expand its reach among users of mobile devices.
The deal is by far Facebook’s largest, bigger than any that Google, Microsoft or Apple has ever inked. And its boldness demonstrates that Facebook wants youth, a wider footprint in more markets and new kinds of services to stay fresh.
Analysts say the staggering price tag highlights Facebook’s drive to be more mobile, global and to remain innovative.
“It shows the continued determination of Facebook to be the ‘next’ Facebook,” says Benedict Evans, a partner and analyst at California-based venture capital firm Andreessen Horowitz.
But the deal was likely to raise worries that Facebook and other technology companies were starting to become overzealous in their pursuit of promising new products and services, said Anthony Michael Sabino, a law professor at St John’s University in New York.
“I expect there to be a lot of scepticism about this deal. People are going to look at this and say, ‘Uh-oh, did they pay way too much for this’?” Sabino said.
Mark Zuckerberg, Facebook’s chief executive officer, first reached out to WhatsApp CEO Jan Koum in early 2012, inviting him for coffee at a bakery in Los Altos, California. They talked for more than two hours, according to a person with knowledge of the matter.
The two became friends, meeting frequently for dinners and hikes.
On February 9, Koum went to Zuckerberg’s California house for dinner. That was when the conversation about a possible deal became serious, the person said. The two first talked about how they could work together more closely on Zuckerberg’s Internet.org initiative for connecting the world on mobile devices.
Zuckerberg, 29, then proposed that their companies join together, and that Koum join Facebook’s board. Koum took a few days to think it over. Five days later, on February 14, Zuckerberg was having dinner with his wife at home when Koum showed up, strawberries in hand. They then negotiated a price.
The purchase would be the biggest internet deal since Time Warner’s US$124 billion merger with AOL in 2001.
WhatsApp, based in Mountain View, California, had more than 450 million members, with one million users joining daily, Facebook said.
WhatsApp lets users send messages through its service on mobile devices based on different operating systems including Apple iOS, Google Android, Microsoft’s Windows Phone and BlackBerry software.
Jim Goetz, a partner at venture firm Sequoia Capital and an early WhatsApp investor, said the price made sense. “WhatsApp has completely transformed personal communications, which was previously dominated by the world’s largest wireless carriers,” he said.
Goetz noted that WhatsApp, which allows users to bypass telecom charges for messaging, was “so widely loved overseas and so under appreciated at home”.
Goetz said WhatsApp had grown faster than any similar company to 450 million users and had just 32 engineers. The business model is simple: no advertising, and users are charged US$1 per year after the first year, which is free. This has resonated with users around the world, from Botswana to China.
Many observers were stunned that Facebook would pay such a steep price at a time when the world’s biggest social network seemed to be riding high.
“The size of this deal is really massive and it will get people talking about a bubble,” said Greg Sterling, senior analyst at Opus Research in California.
Facebook’s US$1 billion Instagram deal seems like a bargain in retrospect. Capturing mobile users, and young people, was a big reason behind Facebook’s 2012 purchase of the photo-sharing app. Even the giant’s reported US$3 billion offer for disappearing-message app Snapchat pales in comparison. Snapchat rejected the bid.
Sterling said the deal was a risk for Facebook because “in social media you have a flavour of the month, and next year we might have another app with extremely rapid growth”.
“I think [the high price tag] comes from the frustration of not being able to buy [the messaging service] Snapchat, and then there is the youth factor,” Sterling added.
“Facebook really needs to have vehicles to attract younger users, and Instagram is not going to do that by itself,” he said.
With this strategy, Sterling said Facebook was “becoming a kind of holding company for different social media properties that appeal to different groups”.
There are 19 billion messages sent and 34 billion received via WhatsApp each day, in addition to 600 million photos and 100 million video messages.
At that rate, Zuckerberg appeared to be confident that the app would reach a billion users.
Facebook said on Wednesday that it was paying US$12 billion in stock and US$4 billion in cash for WhatsApp. In addition, the app’s founders and employees, 55 in all, will be granted restricted stock worth US$3 billion that will vest over four years.
The transaction translates to roughly 11 per cent of Facebook’s market value. In comparison, Google’s biggest deal was its US$12.5 billion purchase of Motorola Mobility, while Microsoft’s largest was Skype at US$8.5 billion. Apple, meanwhile, has never done a deal above US$1 billion.
Facebook likely prizes WhatsApp for its audience of teenagers and young adults who use the service to engage in online conversations outside of Facebook. That site has evolved into a more mainstream hangout inhabited by their parents, grandparents and even their bosses.
WhatsApp also has a broad global audience. It is often the preferred texting app in Hong Kong.
Zuckerberg said the service “doesn’t get as much attention in the US as it deserves because its community started off growing in Europe, India and Latin America. But WhatsApp is a very important and valuable worldwide communication network”.
“WhatsApp is the only widely used app we’ve ever seen that has more engagement and a higher per cent of people using it daily than Facebook itself,” he said.
Ten-year-old Facebook is looking to attract its next billion users while keeping its existing 1.23 billion members, including teenagers, interested. The company is developing a “multi-app” strategy, creating its own applications that exist outside of Facebook, while acquiring others. The company released a news reader app called Paper earlier this month, and has its own messaging app called Facebook Messenger.
Facebook said it was keeping WhatsApp as a separate service, just as it did with Instagram.
“Services with a billion people using them are all incredibly valuable,” Zuckerberg said while discussing the purchase price during a conference call with analysts.
Facebook’s purchase of messaging service WhatsApp for up to US$19 billion is one of the largest technology buys. Here are some other notable tech deals involving US companies.
September 2001Technology giant Hewlett-Packard buys Compaq Computer for US$25 billion.
August 2011Google buys Motorola’s handset business for US$12.5 billion to compete with Apple. Less than three years later, Google sold Motorola to China’s Lenovo for US$2.91 billion.
August 2011Hewlett-Packard buys British enterprise software company Autonomy for US$10.24 billion.
May 2011Microsoft buys internet voice and video leader Skype for US$8.5 billion, the software giant’s largest purchase.
April 2009 Software giant Oracle buys Sun Microsystems and its Java programming language for US$7.4 billion.
September 2013 Microsoft buys Nokia’s handset business for US$7.2 billion to try to catch up with rivals Apple and Google in the smartphone market.
October 2006 Google buys videosharing website YouTube from its founders, Steve Chen and Chad Hurley, for US$1.65 billion.
June 2002 Online auctioneer eBay buys e-commerce business PayPal for US$1.5 billion.
May 2013 Yahoo buys blogging platform Tumblr for US$1.1 billion. April 2012 Facebook buys online photo-sharing service Instagram for US$1 billion. Instagram was Facebook’s largest buy until the WhatsApp deal.