360° Coverage : Quick Take: What's Up with Facebook's WhatsApp Deal?

2 Updates

Quick Take: What's Up with Facebook's WhatsApp Deal?

Feb 28 2014, 2:36pm CST | by

This article was originally posted on the Knowledge@Wharton website on February 21, 2014. Can a text messaging service have the same value as a company that produces life-saving cancer drugs?...

Filed under: news

 
 
 

28 weeks ago

Quick Take: What's Up with Facebook's WhatsApp Deal?

Feb 28 2014, 2:36pm CST | by

This article was originally posted on the Knowledge@Wharton website on February 21, 2014.

Can a text messaging service have the same value as a company that produces life-saving cancer drugs? According to Facebook, the answer is yes. When the firm announced on Wednesday that it is purchasing Mountain View, Calif.-based WhatsApp for $19 billion — $16 billion in cash and stock, and $3 billion in restricted stock units — an article in  Bloomberg noted that such valuations have only ever been given to firms that develop drugs for illnesses such as cancer and Crohn’s disease.

WhatsApp enables users to create profiles to share text messages, photos and videos over their smartphones. With 450 million monthly users, the service is expanding rapidly in Africa, Asia and Latin America. The WhatsApp acquisition would give Facebook a much needed foothold in emerging markets, where its presence is lacking, analysts say.

Currently, WhatsApp’s service is free for the first year, and then $1 for each year thereafter. In a statement following Wednesday’s announcement, Facebook founder and CEO Mark Zuckerberg said that WhatsApp is “on a path to connect one billion people” within the next few years. At the current fee, that could eventually mean $1 billion in annual sales for Facebook,Bloomberg noted. (In a previous Knowledge@Wharton story, Wharton faculty warned that Facebook inevitably will need to find revenue streams beyond advertising in order to avoid alienating users.)

“WhatsApp is the only widely used app we’ve ever seen that has more engagement and a higher percentage of people using it daily than Facebook itself,” Zuckerberg added. (According to  CNET, the engagement rate of WhatsApp’s monthly users on a daily basis is 70%, whereas Facebook’s is around 61%.) Given the potential upsides, however, does the deal make sense at such a steep price? Knowledge@Wharton asked two Wharton experts —Kartik Hosanagar, professor of operations and information management, and Lawrence G. Hrebiniak, emeritus professor of management — whether they believe the move ultimately will pay off.

Kartik Hosanagar:

“For Facebook, the acquisition makes sense for several strategic reasons, which I outline below. The valuation is hard to justify from a purely financial standpoint. In my opinion, the valuation reflects [the fact] that … Facebook was willing to pay whatever was needed to keep WhatsApp away from competitors such as Google. Secondly, Facebook has been aggressive in identifying the next big trends and startups in social [media] and trying to acquire those companies before they can eventually become serious threats to Facebook — for example, Instagram. So, Facebook paid a premium to bring a potential long-term threat in-house. So, to me, the valuation was less about financial upside but reflected a nice defensive move by Facebook.

“Now, why did acquiring WhatsApp make sense in the first place? One reason is opportunities: Growth for Facebook is going to come from emerging markets, where WhatsApp is very strong. Messaging is important for Facebook, and it has invested a lot in its standalone messenger app. Further, WhatsApp comes with [an existing] revenue model, which I suspect Facebook will not toy around with.

“There is another trend worth noting here. For a while now, Facebook has acknowledged that a one-size-fits-all Facebook doesn’t make sense going forward. People want to share different types of content with different users. There are several use cases for which Facebook is not ideal, and that creates an opening for an entrant to come in and take over the social networking space. This is especially true in mobile and, in response, Facebook has built separate apps for separate use cases (as opposed to those use cases that are features within Facebook). For example, Facebook launched Facebook Camera, and later acquired Instagram when the Camera app did not take off. It also launched Poke [a pared-down form of instant messaging], and then made an offer to acquire SnapChat when Poke failed. [Recently, the company] launched Paper, an app for news. [It also] launched its standalone messenger app. Now, it has acquired WhatsApp.”

Lawrence G. Hrebiniak:

“Facebook is paying $19 billion for a messaging company with 55 employees — a cost of approximately $345 million per employee. They must be really special and talented! The firm is buying a company with [minimal] revenue and one that has eschewed an advertising-revenue model…. Is the hot messaging technology worth such a huge amount? Is this a good move or a form of insanity? Let’s consider a few facts or motives.

“Facebook’s growth has slowed, and WhatsApp is growing — which speaks positively for the acquisition. Both of the companies are in the same business [social networking], but the communication methods or technologies are different, so Facebook is adding some new capabilities — which, again, is good. Facebook may also be trying to limit competitors’ options — for example, making a first move to keep Google and others from getting into their competitive space.

“I’m still not convinced, however, about the logic of the deal. What is the projected business model for the combined companies? Will monetization or revenue generation become a reality? Is it worth $19 billion to keep Facebook relevant and fresh in the market? $19 billion is roughly a third of Ford Motor Company’s and HP’s market cap — is this reasonable, or is the bubble inflating? There may be a strategy here, but it eludes me at the moment. The price seems way overboard, especially when put in the context of other acquisitions in the communications arena. I wish Facebook luck, but this feels like a dumbfounding deal that looks overpriced and risky.”

Source: Forbes Business

 
Update
2

2 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

3 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH17" hits home. ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Debate over decentralisation of financial powers begins in UK
London, Sep 19 (IANS/RAY) The Scottish referendum may have gone in the United Kingdom's favour, but the debate over de-centralisation of financial powers is not over yet.
 
 
Now a campaign to debunk myth about sugar
London, Sep 19 (IANS) As obesity and sugar related problems are faced by a huge number of people, a new campaign has been launched to inform and educate people about sugar and the role it can play as part of a healthy balanced diet.
 
 
Nepal, GMR sign landmark pact to boost energy cooperation
Kathmandu, Sep 19 (IANS) The Nepal government and the GMR-ITD Consortium Friday signed a landmark Project Development Agreement (PDA) to develop the 900 MW Upper Karnali hydropower project, aiming to boost bilateral power cooperation wioth India.
 
 
Childless couples too enjoy family meals
New York, Sep 19 (IANS) Couples without kids in the house are just as likely as adults living with young children or adolescents to eat family meals at home on most days of the week, says a US-based study.
 
 
 

Latest from the Network

Sharif accuses opponents of using human shields
Islamabad, Sep 19 (IANS/RAY) Pakistani Prime Minister Nawaz Sharif Friday accused cricketer-turned-politician Imran Khan and religious leader Tahirul Qadri and their parties of "inciting people to opt for mutiny". He...
Read more on Politics Balla
 
South Korean stars light up Asiad opening ceremony
Incheon, Sep 19 (IANS) South Korean stars shone brightly at the opening ceremony of the 17th Asian Games here Friday. The first appearance of stars was during the welcoming performance with the host nation's famous K-...
Read more on Sport Balla
 
Debate over decentralisation of financial powers begins in UK
London, Sep 19 (IANS/RAY) The Scottish referendum may have gone in the United Kingdom's favour, but the debate over de-centralisation of financial powers is not over yet. The BBC commented: "The fact that over 1.5...
Read more on Politics Balla
 
Now a campaign to debunk myth about sugar
London, Sep 19 (IANS) As obesity and sugar related problems are faced by a huge number of people, a new campaign has been launched to inform and educate people about sugar and the role it can play as part of a healthy...
Read more on Celebrity Balla
 
Nine involved in Karachi naval dockyard attack held
Islamabad, Sep 19 (IANS) Pakistan's Defence Minister Khawaja Asif Friday claimed nine men accused of involvement in Karachi naval dockyard attack have been arrested but two key accused remain at large, Geo News...
Read more on Politics Balla
 
Nepal, GMR sign landmark pact to boost energy cooperation
Kathmandu, Sep 19 (IANS) The Nepal government and the GMR-ITD Consortium Friday signed a landmark Project Development Agreement (PDA) to develop the 900 MW Upper Karnali hydropower project, aiming to boost bilateral...
Read more on Business Balla
 
Nicole Kidman says final goodbye to father
Sydney, Sep 19 (IANS) Actress Nicole Kidman broke down as she said her final goodbye to her father Antony Kidman at his funeral here Friday. The A-list Hollywood actress was accompanied by her husband Keith Urban and...
Read more on Celebrity Balla
 
Colours, technology dominate Asiad opening ceremony
Incheon, Sep 19 (IANS) Vibrant use of colours and technology dominated the opening ceremony of the 17th Asian Games being held at the Incheon Asiad Main Stadium here Friday. The ceremony began with an array of...
Read more on Sport Balla
 
Dozens of rebels killed in Yemen clashes
Sanaa, Sep 19 (IANS/EFE) Dozens of Houthi militants were killed Friday in clashes with Yemeni security forces around the headquarters of the state television in the capital, the rebels and eyewitnesses said. The Shia...
Read more on Politics Balla
 
Childless couples too enjoy family meals
New York, Sep 19 (IANS) Couples without kids in the house are just as likely as adults living with young children or adolescents to eat family meals at home on most days of the week, says a US-based study. "Most...
Read more on Apple Balla