Facebook’s acquisition of WhatsApp: The true reason for this deal – Synergy


Facebook’s acquisition of WhatsApp is one of the biggest acquisitions in the tech industry. The numbers don’t lie; the price was $4 billion in cash, $12 billion in stock (8.5% of Facebook’s stock) plus $3 billion in restricted shares. This adds up to a staggering $19 billion dollars.

The numbers don’t add up though. WhatsApp was founded in 2009 and already it acquired 450 million users, which is three times more than Facebook had acquired in the same period of time. Now these numbers are impressive, you might think. Note that Facebook paid $19 billion for 450 million users, which is $42.22 dollar per user. That seems quite expensive. The cash flow isn’t too impressive either. This 450 million user and $19 billion company has a revenue of no more than $20 million dollar.

WhatsApp’s co-founder and CEO Jan Koum had been pounded often by investors who wanted a piece of his company. He turned them all down, as he knew that WhatsApp was worth more. And besides, why would a CEO ever leave a company when it is still growing at this pace?
The truth is that no company before had ever bid the amount that Facebook offered. We just did the math, it seems highly overpriced. So what is the reason for Facebook to pay this amount?

Monetising

It won’t be monetising the app further than the yearly dollar subscription fee. Many of WhatsApp’s competitors have monetised their apps through stickers, sponsor channels, ads and in-game purchases. This doesn’t stroke with the believes of Facebook however, who have always wanted a clean appearance for their users. Indeed, Mark Zuckerberg himself told the WhatsApp ‘zero pressure’ to make money. All Mark Zuckerberg was interested in, as history made clear, was user numbers.

User volume

The user volume of WhatsApp is growing faster than Facebook. Also, the engagement number of WhatsApp is the only app which beats Facebook, claimed Mark Zuckerberg.

Fill global gaps

If you consider that Facebook’s growth is holding back, because it is hard for them to enter Asia and Latin America it all starts to make sense. While not in China and Japan, WhatsApp is the clear leader across most of Asia and Latin America. So Facebook was struggling with the shut door they found in these countries. WhatsApp could be the back entrance they need. How will Facebook profit from WhatsApp’s presence through?

Integration

Facebook
Click for enlarged view

Facebook is already trying options to merge WhatsApp in their services and vice versa. Even though Facebook already has Messenger, a merging with WhatsApp seems very logical. Messenger is actually quite a big texting app by itself, even leader in the US and France. This could mean that if they can merge these two massive networks, the impact on network effects would be huge.

User Tracking

Ever noted that Facebook wants your number for security reasons? Guess what other phone number they already have of you in which app? That’s right. Could these be linked together? They sure can.

Every time you are sending messages through WhatsApp, Facebook identifies valuable relationships of you with these persons. This is all input for your Facebook news feed.

So others don’t buy it

Other tech giants such as Microsoft and Apple were luring on WhatsApp too. Facebook saw their growth numbers decline and realised they could make better use of the app than most of these others. Besides, Facebook probably would rather not compete with companies of that size, which have proven to be aggressive players in their own rights.

Conclusion – Synergy

There is no one real reason why WhatsApp was worth this amount of money. There are actually many. All we know is that for Facebook to buy WhatsApp makes more sense than other potential deals. There is actually a natural synergy, as it seems that WhatsApp is able to fill some of the gaps Facebook couldn’t fill themselves. Truth be told, I don’t think that Facebook knows all the potential benefits. Only the future will tell if these companies merge together well and if WhatsApp was worth all this money.


Clark, J & Sataranio, A. (2015) Apple Acquires Startup Developing Advanced AI for Phones, Bloomberg.com, October 8, 2015.

Olson, P. (2014) Inside The Facebook-WhatsApp Megadeal: The Courtship, The Secret Meetings, The $19 Billion Poker Game Forbes, March 24, 2014

Kelly, G. (2014) 5 Key Reasons WhatsApp Is Worth $19 Billion — To Facebook Forbes.com, Feb 20, 2014

Berman, D. K. (2014) I Thought Facebook’s WhatsApp Deal Was Crazy. Then I Did Some Math. Wall Street Journal, February 24, 2014

Watts-Jones, M. (2013) 10 ways that messaging apps monetize – a guide to monetization Linkedin, September 13, 2013

Triggs, R. (2015) Facebook begins testing WhatsApp integration Android Authority, April 6, 2015

 

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