SAN FRANCISCO — The $19 billion that
"It's 19 Instagrams," observed serial start-up entrepreneur Adam Rifkin, referring to the $1 billion Facebook paid for the popular photo-sharing app in 2012.
But analysts say the purchase of WhatsApp could pay off for Facebook as it takes on
Technology giants are fighting for their future as consumers switch their allegiances from personal computers to mobile devices. That trend is accelerating as smartphones proliferate around the world. By 2015, 5 billion people are expected to be carrying around the tiny computers in their pockets.
As a result, nimble start-ups that have outpaced their grown-up rivals in building popular mobile services have become takeover targets, commanding stratospheric valuations.
Just last year Facebook offered $3 billion for Venice Beach messaging company
With 450 million users, WhatsApp is the market leader in mobile messaging. Chief Executive Jan Koum says his company's goal from the start was "to be on every single smartphone in the world."
Facebook is betting WhatsApp can help it leapfrog competitors in messaging, the new communication medium of choice, especially among teens.
The stakes could not be higher for Facebook. More and more people are communicating one on one or in small groups on their mobile devices rather than blasting information to hundreds of friends on social networks. Its very survival depends on its ability to latch onto the new ways people are connecting and sharing.
By that logic, the price Facebook is paying for WhatsApp isn't so bubbly, said David Wessels, a finance professor at the
"As a stand-alone company, WhatsApp is clearly not worth $19 billion, period," Wessels said. "But by no means would I consider this irrational. Would you give away 10% of your company to extend the life of your company?"
Another benefit of the deal: Facebook kept WhatsApp out of a competitor's clutches.
Google reportedly offered $10 billion for WhatsApp. And last week, Google CEO Larry Page personally met with Koum in a last-ditch effort to talk him out of selling his company to Facebook, according to the technology news service the Information.
The skirmish "highlights the potential of mobile messaging as the next Facebook of the mobile age," said Steve Chung, chief executive of messaging company Frankly. "Mobile messaging has huge potential to become the dominant platform for all social communication, content and entertainment."
At first, Facebook investors did experience what Sterne Agee analyst Arvind Bhatia called "sticker shock" after learning that Facebook planned to shell out $19 billion in cash and stock for WhatsApp, a company that had declared it had no plans to make money any time soon.
The deal values WhatsApp higher than 275 companies in the S&P 500 index — a remarkable shift in fortune for the company founded in 2009 by former Yahoo employees Brian Acton and Koum, a Ukrainian who came to the U.S. when he was 16 and lived on food stamps.
But investors quickly shrugged off concerns. Shares of Facebook briefly hit a record high of $70.11 before closing up 2% to $69.63.
Even though the extraordinary sum Facebook is paying for WhatsApp defies any traditional means of evaluating the worth of a company, Facebook is certainly not alone in placing sky-scraping valuations on unproven start-ups, analysts say.
It isn't 1999, but companies with loads of users — but few prospects for making money — are being handed lofty market values, said Aswath Damodaran, who teaches corporate finance and valuations at
According to research firm Statista, Facebook is paying $42 for each WhatsApp user, which is roughly what it paid for an
Facebook is quick to point out that WhatsApp reached 450 million users faster than any company in history, doubling its user ranks in the last year. By way of comparison, Facebook had fewer than 150 million users after its fourth year, a third as many as WhatsApp in the same period.
WhatsApp's rapid growth — it adds 1 million users a day — and its hold on users — 70% log into the service every day — "are hard to match," Bhatia said. And WhatsApp is already twice the size of Twitter, which is currently valued at more than $20 billion.
WhatsApp, like all consumer Internet companies, will be held hostage to people's fickle tastes. And although it may be wildly popular in Europe and Latin America, WhatsApp is overshadowed by rival messaging services in Asia. Kakao rules South Korea. Line is tops in Japan, and WeChat, run by Tencent, is the go-to messaging app in China.
Then there's the matter of WhatsApp's strong aversion to the ways consumer Internet companies typically make money, namely through advertising. This week, Koum reiterated that his company would never sell ads, and Facebook co-founder and Chief Executive
Damodaran said it's anyone's guess whether WhatsApp will ever justify its eye-popping valuation.
"If you look back at the dot-com era, the companies were collectively overvalued. But there were winners," he said. "The winners here won't be those with the most users. They will be those companies that are successful at converting those users into revenues."