Justifying WhatsApp's $16 Billion Price Tag To Facebook

Everything you need to know about Facebook's single-largest deal to date, and one of the largest in recent memory for web companies.

In one of the largest internet deals in recent memory, Facebook said today that it would acquire WhatsApp for up to $19 billion through a combination of cash, stock, and restricted stock units.

Facebook, which missed out on buying Snapchat for about $3 billion late last year, is spending more than a third of its existing cash pile on a company of about 55 people who have built one of the fastest-growing messaging services in the history of the web. At the time of the acquisition, WhatsApp had more than 450 million monthly active users and every day the service was growing by 1 million new users, 70% of which check the app on a daily basis.

WhatsApp will coexist with Facebook Messenger, the company's own messaging product, in what is essentially an admission from CEO Mark Zuckerberg that the company didn't have real-time communication down — even with a standalone application for Facebook Messenger which also tied in with text messaging on Android devices.

"It's widely used today for chatting with your Facebook friends, and a lot of the messages are not real time," Zuckerberg said on a conference call to discuss the acquisition. "Someone will send a message, almost like a more informal email. WhatsApp evolved from replacing SMS, real-time communication with all your contacts and small groups of people."

The deal was done, like in the case of Instagram, personally by Zuckerberg. On the conference call, he said he met with WhatsApp CEO and founder Jan Koum about 11 days ago to discuss the merger, though talks have been on and off for the past several years. The deal was finalized on Valentine's Day, last Friday, according to Business Insider's Nicholas Carlson.

While Facebook is quite active in acquiring companies, it's become clear that Zuckerberg personally handles deals with companies that represent a sort of existential threat to Facebook. Facebook bought Instagram for what was seemingly a cheap $1 billion at the time — which some in the venture capital community now say was too little — at a time when it was the fastest-growing photo-sharing application in the world. Likewise, it sought Snapchat when it became clear that the self-destructing photo-sharing app was siphoning a younger set of Facebook's users away from the service.

WhatsApp, too, represents an existential threat to Facebook as a smattering of messaging apps have risen up to challenge the dominance of Facebook as a method for sharing content through mobile devices. "Messaging is a very competitive space, and WhatsApp is the clear global leader with this," Zuckerberg said on the call, in response to a question about competing messaging apps like Kakao, Line, and WeChat.

It represented so much of a threat that Zuckerberg was willing to spend $349 million on every employee WhatsApp, which is on track to hit 1 billion users faster than Facebook was ever able to do. WhatsApp employees will enjoy an incredibly healthy return for their efforts, but it will be nowhere near that of Sequoia Capital's Jim Goetz, whose roughly $60 million million investment has blossomed into an enormous return for the firm.

Easily the biggest VC-backed M&A exit ever. And, possibly, one of the top 5 or 10 VC deals of all time.

Like Instagram, WhatsApp will operate as an independent unit in Facebook's new arsenal of standalone applications. WhatsApp currently charges $1 a year for its messaging service, though the first year's fee is waived for new users. "With 50 people at their company, they build a product and a network that has almost a half billion people using it in five years — no one in the history of the world has done that before, it'd be pretty stupid for us to interfere in a big way," Zuckerberg said on the call.

WhatsApp didn't get away in the same way that SnapChat did, but Facebook once again faces a tech equivalent to whack-a-mole: as soon as Zuckerberg takes out a competitive threat, a newer, cooler one is certain to emerge. As evidenced by the talks taking this long to come to fruition, Zuckerberg is once again missing the boat on taking out threats early. He is, though, at least getting a little better at identifying them, in the case of cloning Snapchat with Facebook's Poke app and getting the talks started with WhatsApp much earlier.

Still, Zuckerberg today showed he — in a fashion much like Google did early in its life and still does today — is ready to write huge checks for companies that are able to outmaneuver Facebook. That's especially true when it comes to messaging, and Zuckerberg essentially payed $16 billion to stay a little bit ahead of the curve. What remains to be seen is if it works.

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