Facebooks acquistion of Whatsapp Seema Pujani, ITS Probationer 2014-15

1Why the dealIn February 2014, Facebook purchased WhatsApp for $19.2 billion, whilst also making the founder a director of Facebook. The deal shocked most on Wall Street. Whatsapp:450 million users (at the time of the deal-In January, 2015 the figures rose to 700 million)70% active daily users1 million new user registrations/day

Immense growth in a rapid fashion for a firm that hardly employs 50 odd people!

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Whatsapp AdvantagesPowerful features:Rapid text messagingEngaging private and group chat optionsQuick file sharing Sleek user interfaceMinimum system requirements and data usageFreemium Model (free usage first year, $0.99 from second year)

5What is in it for FBIncreasing presence in the mobile market and creating a loyal customer baseAdvantages of cost and scaleAdds to brand valueKeeps rival Google out of the competitionCurrent revenue model (based on subscription fee) not lucrative so could integrate Facebook with Whatsapp and/or undertake data mining and earn revenue from advertising

What does the deal compriseIt isnt a leveraged buyout or a debt fueled acquisition.It is a cash plus share deal.$4 billion in cash$12 billion worth FB shares$3 billion ESOP (Employee Stock Ownership Plan)With rise in FB stock, deal valued at about $21.4 billion by end of 2014

In its current revenue model (with a 1$ subscription), the deal would not make sense. Another 36 years needed to break even. Changes ought to be made to the business model of whatsapp to generate $2.8 billion by the end of fifth year.

One parameter on which the deal makes complete sense is when valuation is done on the basis of customer base.

VerdictMore critics than supporters of the acquisition: the revenue model criticized for its inability to monetize the user base with no advertising and little by way of profitsFB targeting long run growth in future by nipping the competition in the bud and acquiring related social media (such as Instagram earlier for $1 billion)It seems sensible when seen in the light of benefits of synergyChanges already in the pipeline. For example, the feature of voice call made available in India for all Android users in whatsapp on 31st March, 2015.