Facebook to buy WhatsApp for $19 billion in deal shocker
Facebook’s purchase of messaging service WhatsApp for up to $19 billion in cash and stock is one of the largest acquisitions ever in the technology sector.
Facebook Inc will buy fast-growing mobile-messaging startup WhatsApp for $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.
vThe transaction involves $4 billion in cash, $12 billion in stock and $3 billion in restricted stock that vests over several years. The WhatsApp deal is worth more than Facebook raised in its own IPO and underscores the social network’s determination to win the market for messaging.
Facebook-WhatsApp deal one of biggest ever in tech
Here are some other notable deals involving US tech companies, in order of dollar amount from largest to smallest:
vHEWLETT-PACKARD BUYS COMPAQ - SEPTEMBER 2001
US technology giant Hewlett-Packard buys Compaq Computer for $25 billion in a bid to compete with IBM.
GOOGLE BUYS MOTOROLA MOBILITY - AUGUST 2011
Internet search giant Google buys the handset business of Motorola for $12.5 billion in a bid to challenge Apple in the smartphone market. Less than three years later, Google sold Motorola to China’s Lenovo for $2.91 billion.
HEWLETT-PACKARD BUYS AUTONOMY - AUGUST 2011
US technology giant Hewlett-Packard buys British enterprise software company Autonomy for $10.24 billion. US authorities later open an investigation amid HP accusations that Autonomy had engaged in “accounting improprieties.”
MICROSOFT BUYS SKYPE - MAY 2011
Microsoft buys Internet voice and video leader Skype for $8.5 billion, the largest acquisition ever by the US software giant.
ORACLE BUYS SUN - APRIL 2009
US business software giant Oracle buys struggling Sun Microsystems and its Java programming language for $7.4 billion.
MICROSOFT BUYS NOKIA - SEPTEMBER 2013
Microsoft buys the handset business of former market leader Nokia for $7.2 billion in an effort to catch up to rivals Apple and Google in the smartphone market.
GOOGLE BUYS YOUTUBE - OCTOBER 2006
Internet search giant Google buys online video platform YouTube in October 2006 from its founders, Steve Chen and Chad Hurley, for $1.65 billion.
EBAY BUYS PAYPAL - JUNE 2002
Online auction house eBay buys online payments firm PayPal for $1.5 billion.
YAHOO BUYS TUMBLR - MAY 2013
Former Google executive Marissa Mayer makes her biggest purchase since taking over as CEO of Yahoo, buying the popular blogging platform Tumblr for $1.1 billion.
FACEBOOK BUYS INSTAGRAM - APRIL 2012
Facebook offers $1 billion for hot smartphone photo-sharing service Instagram. The purchase of Instagram was Facebook’s largest until the WhatsApp deal.
Founded by a Ukrainian immigrant who dropped out of college, Jan Koum, and a Stanford alumnus, Brian Acton, WhatsApp is a Silicon Valley startup 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 $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 CEO Koum just 10 days earlier, on the night of February 9.
WhatsApp was 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 Holdings Ltd’s WeChat, offer games or even e-commerce on top of their popular messaging features.
The deal provides Facebook entree to new users, including teens who eschew the mainstream social networks but prefer WhatsApp and 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.
How the service will pay for itself is not yet clear.
Zuckerberg and Koum on the conference call did not say how the company would make money beyond a $1 annual fee, which is not charged for the first year. “The right strategy is to continue to focus on growth and product,” Zuckerberg said.
Zuckerberg and Koum said that 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, an early investor in Snapchat, another red-hot messaging company that flirted year ago with a multibillion dollar acquisition offer from Facebook.
“Facebook is more about content and has not yet fully figured out communication.”
Even so, many balked at the price tag.
Facebook is paying $42 per user with the deal, dwarfing its own $33 per user cost of acquiring Instagram. By comparison, Japanese e-commerce giant Rakuten just bought messaging service Viber for $3 per user, in a $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 that has seen growth slow in recent quarters.
“This is a tacit admission that Facebook can’t do things that other networks are doing,” he 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 deals like these won’t be the last one and that is something for investors to consider.”
Venture capitalist Sequoia Capital, which invested in WhatsApp in February 2011 and led three rounds of financing altogether, holds a stake worth roughly $3 billion of the $19 billion valuation, according to people familiar with the matter.
“Goodness gracious, it’s a good deal for WhatsApp,” said Teo, the early investor in Snapchat.
Facebook pledged a break-up fee of $1 billion in cash and $1 billion in stock if the deal falls through.
Facebook was advised by Allen & Co, while WhatsApp has enlisted Morgan Stanley for the deal.
Shares in Facebook slid 2.5 percent to $66.36 after hours, from a close of $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. “Given the relative size, the enterprise valuations this is a very significant deal and it may not be the last one.”
WhatsApp: a booming smartphone message service
WhatsApp was launched five years ago as a shot at doing to text messaging what Skype did to telephone calls.
If Facebook’s move to buy the startup in a cash-and-stock deal valued as high as $19 billion is any indication, the California-based WhatsApp may have hit the mark.
The firm founded by former Yahoo employees Brian Acton and Jan Koum in 2009 took its name from a play on the phrase “What’s Up,” according to its website.
They also devoted themselves to a credo of “No Ads. No Games. No Gimmicks.”
A note stating just that and signed by Acton remains taped to Koum’s desk, according to venture capital firm Sequoia, which invested in the startup early and stands to cash in big time on the Facebook take-over.
The “contrarian approach” of gathering no information about users for targeting ads was shaped by Ukraine-born Koum’s aversion to tactics of secret police in communist countries, Sequoia partner Jim Goetz said in an online note.
“Jan’s childhood made him appreciate communication that was not bugged or taped,” Goetz said.
“When he arrived in the US as a 16-year-old immigrant living on food stamps, he had the extra incentive of wanting to stay in touch with his family in Russia and the Ukraine.”
Koum remained true to those ideas when, after working at Yahoo with his “mentor” Acton, he turned to building WhatsApp, according to Goetz.
The stated mission was to build a better alternative to traditional SMS messaging in a world where smartphones were clearly becoming ubiquitous.
The founders jokingly described themselves at the website as “two guys who spent combined 20 years doing geeky stuff at Yahoo! Inc.”
WhatsApp is a platform for sending images, video, audio, or text messages for free over the Internet using data connections of smartphones.
The application is free, but after using it for a year, there is an annual subscription fee of 99 cents.
“We feel that this model will allow us to become the communications service of the 21st century, and provide you the best way to stay in touch with your friends and family with no ads getting in the way,” the startup said in a blog post discussing pricing.
WhatsApp is reported to have grown stunningly fast to more than 450 million users and said to handle 50 billion messages daily.
As of the start of this year, WhatsApp had 50 employees, more than 30 of them engineers. While the company has its headquarters in the California city of Mountain View, where Google has its main campus, most of the engineering work is reportedly done in Russia. - AFP