On February 19th, Facebook announced it was acquiring WhatsApp for $19 billion ($4 billion in cash, $12 billion in stock and $3 billion in restricted share for WhatsApp staff and founders). The WhatsApp messaging service has more than 450 million users, with an estimated growth of one million users per day. This values each WhatsApp user at around 43$ compared to the 3$ per Viber user. Viber is another instant messaging service, with around 300 million users, acquired on the February 14th by Japanese internet company Rakuten for $900 million.


The acquisition of WhatsApp by Facebook has seen a mixed reception, with questions being raised around its exorbitant valuation and the future of the platform and its users. This acquisition was seen as a strategic move. WhatsApp has the potential to reach one billion users, a number only Facebook has managed to achieve so far, with nearly 1.3 billion current users in terms of network.


Some suggest that the social network is reaching its maximum number of users, with a slower user growth especially in developed countries. Facebook and WhatsApp said that the messaging service would remain as a separate company and be managed accordingly. Does such a move justify the $19 billion price tag?


WhatsApp’s current revenue stream is the yearly 1$ subscription paid by its users after the first free year of usage. This revenue is relatively insignificant for Facebook. However, the wealth of information that can be gathered from its users’ private conversations is quite considerable. It is hard to imagine that this did not factor into Facebook’s decision and valuation. Nevertheless, WhatsApp’s CEO and co-founder, Jan Koum, was clear that his service would keep most of its autonomy and that its users will not be seeing advertising on the app anytime soon.


Facebook’s business model is based on gathering information from its users to use them as an advertising target. Facebook also gathers data from Instagram, a picture based social network, which it acquired for $1 billion in April 2012. As two privacy groups - the Electronic Privacy Information Center and Center for Digital Democracy - have filed a complaint with the Federal Trade Commission (FTC) to investigate the deal over privacy concerns,  the concern is growing around how WhatsApp will tie into Facebook and vice versa.


The deal has been compared to Google’s acquisition of YouTube in 2006 (for $1.65 billion) and Ebay’s acquisition of PayPal in 2002 (for $1.5 billion). Yet these companies properly tied their services together to their advantage. However, it important not to forget that, at least for now, WhatsApp will remain mostly autonomous with no foreseeable integration with Facebook.


The only obvious reason for this acquisition is therefore the strategic dominance in terms of (mobile) users this gives Facebook. However, it seems that Facebook CEO, Mark Zuckerberg and Jan Koum have been in regular direct contact, which indicates that there is another layer to this deal.


Facebook is not just acquiring its biggest contender in terms of numbers, a huge share of the mobile messaging market and access to developing country markets at a hefty price. It is safe to speculate that both CEOs have a plan as to how to tie their networks together to satisfy both of them. How this will happen remains so far unclear.


The $19 billion price is what has surprised most, with experts saying Facebook overpaid and Zuckerberg claiming the service is actually worth a lot more. The Facebook CEO is betting on the growth of the messaging app to justify his company’s investment. The question is whether WhatsApp will grow as much as he hopes. User growth is a key factor in the valuation of all of these tech companies. They seem to be huge bets based on promises of performance. Twitter has just seen the reverse effect of this focus on user growth.


According to data compiled by Bloomberg regarding the $19 billion valuation, based on a price to sales ratio the only companies that fetch such high valuations are biotechnological or pharmaceutical companies developing treatments for cancer and other major health conditions.


It hardly seems fitting that tech companies based on something as intangible as the web compare. Start-ups are competing in terms of number of users and valuation with little regard to revenue.


Financial valuation for these companies seems to be made in another dimension where the criteria are not the same as for other companies. The valuation game is growing and so are the worries over a new dotcom bubble. This can only be sustainable if this other dimension remains out of touch with the rest of the market. Yet it is bound to happen and then we will know if indeed we have a bubble.


Charles-Édouard van de Put is co-founder and director at The Charta read his bio and letter here. (@cevdp)


In the past couple of months we have seen a number of major events on the financial side of the tech scene. The two main ones are the drop in share price of micro-blogging platform Twitter and the multibillion dollar acquisition of instant mobile messaging service WhatsApp by social media giant Facebook.


On February 5th, Twitter saw its share price drop after announcing its first results as a listed company. Twitter’s revenue in the last quarter of 2013 increased by 116 per cent compared to same period in 2012 - more than most analysts expected - and 9 million new users joined the platform during this same quarter. This last number caused the drop: the user growth was not enough for the markets.

Acquistions in tech in the past 15 years, WhatsApp in light blue (view interactive version at simplybusiness)



by C.-É. van de Put