WhatsApp | Facebook (pt I)

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Gosh, where do I start, Nigel Scott asked me what I thought about the WhatsApp acquisition by Facebook this morning and I replied that I was pulling together my thoughts and that I was gobsmacked at the time; I am still gobsmacked and here are my rather unstructured thoughts below.

The valuation
Ok lets talk about the valuation in bald terms first. On January 20, WhatsApp announced that it had 430,000,000 active users to date. Let’s be generous and not slice and dice what ‘active numbers to date’ actually means. Let’s also assume that they gained 10 million additional users between January 20 and today. The business has been going since 2009 so that may not be that big a step in terms of value.

When you buy WhatsApp in the iTunes store you pay roughly US$ 0.99 for the application, on Android and other platforms you get to download it for free and then pay US$0.99 each year for the privilege of using the service. For the sake of simplicity I am going to assume that they have done US$880,000,000 in total revenues to date  and US$440,000,000 over the past 12 months.

That would put Facebook as paying some 43 times earnings for WhatsApp, I believe that my revenue estimates are on the high side, so I suspect Facebook is probably paying north of 50 times revenue.

If we think about this in terms of price/user then Facebook is paying about US$43 per user for WhatsApp. It’s a high cost of acquisition but not the most expensive paid. My friend Calvin compared this deal to Lycos acquisition by Terra Networks in 2000 in an all stock deal valued at US$12,500,000,000; or US$379 per user. You could double those numbers to get an approximate modern value.

Stock versus cash
Not all money is created equal and that is especially true when it comes to mergers and acquisitions. In both the Lycos and WhatsApp deals discussed above the bulk of the purchase value was in stock. In the case of WhatsApp there is just US$4,000,000,000 in cash, US$12,000,000,000 in stock and a further US$3,000,000,000 in deferred stock for WhatsApp employees.

So essentially Facebook can pay the bulk of the acquisition by printing more stock certificates, a model that Cisco Networks pursued successfully through the late 1990 and into the late noughties. The value of that stock can go higher, or become just 0.84% in the case of Lycos if you were left holding it for long enough for the acquisition of Lycos by Daum.

On the face of it the deferred stock puts a nominal value on each WhatsApp employee of roughly US$60,000,000. Again the risk is deferred, by structuring the the release of the stock over a number of years Facebook puts all the risk on the employees.

Facebook went to IPO at 100 times revenue, so WhatsApp at 50 times revenue paid for with stock valued at 100 times revenue could look like a comparative bargain.

The high cost of looking under the hood
One thing that I found really interesting about the deal was the penalty clause involved between the two companies. If Facebook can’t get the deal to work, it ends up paying US$1,000,000,000 in cash to WhatsApp for looking under the hood.

Now obviously it shows commitment from Facebook that they want the deal to happen, but there is also a high inherent value in Facebook finding out who WhatsApp works and why has it been successful. This is also reflected in the WhatsApp employee earnout value of US$3,000,000,000. Finally it gives us a notional value of how much Facebook thinks it would cost for it to replicate WhatsApp’s success: somewhere north of US$1,000,000,000.

More information
The Facebook IPO Post (I)
The Facebook IPO Post (II)
WhatsApp | Crunchbase Profile
Why Facebook is a dead man walking
Why Facebook is a dead man walking part II?
Why Facebook is a dead man walking part 2.5?
Facebook and advertising or why Facebook is a dead man walking part III?
Facebook: IPO postmortem – a dispassionate analysis
The Facebook | Instagram post


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