Facebook today announced that it will acquire WhatsApp for a combined $16 billion in cash and stock. WhatsApp’s employees pick up an additional $3 billion in restricted stock units as part of the deal.
Wall Street investors are seemingly not pleased and have sent Facebook’s shares down 5 percent in after hours trading. They could be worried about potential dilution stemming from the deal.
Instead, it’s likely that investors are displeased that Facebook bought growth, perhaps because it had to. User growth, that is. If Facebook has to spend so heavily to acquire user growth, its own core strengths of ubiquity, and high engagement are implicitly under stress.
[Update 5pm PST: During a call to investors, Facebook CEO Mark Zuckerberg and WhatsApp CEO Jan Koum managed to calm fears and pull the share price up a bit so it's now only down 2.64 percent in after hours trading. They discussed how WhatsApp would focus on growth rather than monetization. Zuckerberg said ads were not the right way to monetize messaging services, and Facebook CFO David Ebersman noted that WhatsApp will not prioritize further roll out of the $1 a year subscription fee it currently charges in some but not all countries.]
Here’s Facebook itself explaining why WhatsApp is worth the tectonic sums it is deploying to purchase it:
WhatsApp has built a leading and rapidly growing real-time mobile messaging service, with:
- Over 450 million people using the service each month;
- 70% of those people active on a given day;
- Messaging volume approaching the entire global telecom SMS volume; and
- Continued strong growth, currently adding more than 1 million new registered users per day.
Large number of monthly actives? Check. Huge daily engagement? Check. Big growth? Check.
Facebook continues to grow at acceptable levels. Over time, the company’s key metrics have become increasingly financial. Twitter has yet to make a similar transition, naturally. Facebook, though, is a maturing product that investors continue to expect much from in terms of both user and financial growth. There is a tension there.
When you are valued at growth multiples, any wobble in your user expansion rates implies that your future cash flows may be dramatically overvalued at current multiples. And that’s when investors hit the no button and step out. Twitter learned this the hard way in its last quarter when a surprise profit and revenue beat didn’t stop investors from dumping its shares due to weaker than expected 3.9 percent sequential quarter user growth.
So Facebook likely wanted more growth, especially in mobile and non-U.S. markets, and spent $19 billion to get some.
Facebook’s splintering into various apps makes its usage levels harder to gauge. Instagram, WhatsApp, and stand-alone Facebook apps — there are more of those on the way — make what being a ‘Facebook Monthly Active User’ somewhat doughy. But, it will be hard for anyone to complain about Facebook’s user growth with the twin engines of Instagram and WhatsApp on board; you simply have to dilute what your mind thinks of as a ‘Facebook experience’ to get there.
Call it reinvention by spare parts.
Final kicker. Yes, the deal is incredibly expensive. But, unlike with Instagram, WhatsApp has revenue (for shame!). Its subscription fee of $0.99 per user per year after their first year means the company has non-trivial top line. It isn’t hard to see the company with a nine-figure revenue, and at 1 million new users per day, that figure could tip up nicely. Expensive, but not ludicrous.