The famous messaging service, Whatsapp, has been acquired by facebook for:

  • $4 Billion in cash
  • $12 Billion in facebook shares
  • $3 Billion to employees in stock options over 4 years

The deal needs to be done by Aug 19, 2014, (extended by one year only for certain regulatory approvals) otherwise Facebook pays a termination fee of $1 billion (payable in facebook shares also). (Source: Part one of the 8k Filing)

Dilution of 9%

Facebook will issue 183.87 million shares to shareholders of Whatsapp. At the last traded price of Facebook of $68, this is worth about $12.5 billion.

Whatsapp employees will be given another 45.97 million shares as ESOPS (restricted share units). This is further valued at about $3.13 billion.

Existing shareholders will be diluted by about 9% (7% upfront, the rest as ESOPs) – Facebooks market cap is $173 billion.

Valuation

Are you kidding me? Come back in Web 14.0.

But Seriously?

From the 8K filing, Whatsapp has 450 million users, 70% of them are active daily. They are adding 1 million users a day. They are mostly non-US.

Effectively Facebook pays about $40-$45 per user to acquire this company. Given that it’s mostly funny money, this is not too bad (the company pays just $9 per user in cash).

But it is unlikely this growth will go on for too long. The world has 6 billion people, and getting to more than 25% of them will be tough, especially for a mobile app. Eventually this will have to paid for by advertising. (Whatsapp does have a subscription model of $1 per year, but less than 10% of the current users are likely to pay that, in my opinion. The rest will just move to another free service)

If you consider a 15% return per year on investment, the acquisition must return about $2 billion to $3 billion a year in operating profit on whatsapp. (The return on cash is even lower at $600 million)This might be difficult in year one, but it is likely to do so as people move away from horizontals like Google and even traditional facebook to more targeted ones like Whatsapp and Twitter.

Given insane valuations of web startups, this one seems just about right. And given the euphoria such deals generate, the correct thing to do if you are a US market investor would probably be: Buy facebook. (But this is not advice!)

My View

This is why more companies should go public. Facebook just needs to pay $4 billion to acquire something for which it values at about 5 times that. The rest is in dilution of shares. Facebook shares can be worth even more (if the share goes to $100), or half that if the share falls back to $35. There is no cash needed to be paid, companies can be paid for in stock!

In comparison a merger of private companies cannot easily be valued in stock. Surely, the merger between Babyoye and Hoopos involved a stock swap but there’s no real way to value it because there is no liquid market where Babyoye shares could be independently valued. The analysis has to include a lower bound of $0 for the shares given as compensation!

I’ve been talking about why companies like Flipkart and Infibeam should go public. People tout various excuses like they don’t want to dilute 25%, or that they want to value the companies even more or some such crap. This is utterly ridiculous because we are starved of good companies in the digital/web space in the public markets, so we buy stuff like Justdial which has TRIPLED in market cap since listing last year. The flipkarts are losing the scarcity premium, and they are losing the chance for great mergers like the Whatsapp FB one.

Coming to that, I think it’s a good deal for FB, but not so much in the short term for FB shareholders. It’s probably not great for Whatsapp users – one of the reasons I personally like whatsapp is that it’s simple, and whatever Facebook does makes things complicated. Imagine having to only connect with Facebook users, or not knowing if your text actually reached all the people that you sent it to (which will only be known if you have paid Facebook). But for facebook the acquisition gives them access to whatsapp’s user base for a relatively cheap cash cost of $4 billion.

Finally, these numbers are great to look forward to. At $19 billion Whatsapp is valued at over Rs. 120,000 crores, and about 25% of India’s fiscal deficit. It is a higher value than all but the top 10 Indian companies listed on the NSE. It is massive if you compare it with Indian stocks, but it’s a relatively small number for the behemoth that is Facebook. Next time we call ourselves a superpower, we are probably not getting the picture. But it gives you hope – this is the future!

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