Mark Zuckerberg’s latest deal shows how high he’ll go, and how fast he’ll move, to keep Facebook Inc. (FB:US) growing by buying out the competition.
The world’s largest social network agreed Feb. 19 to acquire mobile-messaging startup WhatsApp Inc. for as much as $19 billion, with Zuckerberg, Facebook’s co-founder and chief executive, settling on the terms after five days of talks.
It would be the biggest purchase yet for Facebook and the most expensive for an Internet company in more than a decade. It gives WhatsApp, which has about 50 workers, roughly the same valuation as Gap Inc. (GPS:US), with about 136,000 employees, and more than half the market value of microblogging service Twitter Inc. (TWTR:US)
The deal shows how determined Zuckerberg is to bolster growth and court mobile users, even at the risk of raising concerns about the price he’s willing pay. Facebook shares rose yesterday, suggesting that may not be an issue in this case.
“He’s clearly laying his reputation on the line as a dealmaker,” said Carl Howe, an analyst at Yankee Group. “And $19 billion is just a crazy valuation.”
The numbers were as astonishing as the speed with which Zuckerberg, 29, came to terms with WhatsApp CEO Jan Koum, 38.
“This is not how deal-making happens at your average public company,” said Charles Elson, a professor of corporate governance at the University of Delaware. While “these things are intensely vetted” at other companies, Facebook’s dual-class stock structure gives Zuckerberg majority control.
WhatsApp, based in Mountain View, California, is popular in a crowded field. It competes with apps from Twitter, Kik Interactive Inc. and Snapchat Inc., a startup that rebuffed a $3 billion Facebook bid last year. Other similar apps include Tencent Holdings Ltd.’s WeChat in China, KakaoTalk in Korea and Line in Japan -- and Facebook’s own Facebook Messenger.
With about 450 million members now, WhatsApp is growing by about 1 million every day. Facebook’s co-founder said that scale and growth will help his company accomplish its central mission.
“As Facebook works to connect the entire world and to build the infrastructure for a global community, WhatsApp will clearly help accelerate our progress,” Zuckerberg said on a Feb. 19 conference call. “Jan and the team have built a product that is simple, fast, reliable and a really great experience for people.”
Unlike traditional text messages, which people pay for through their mobile-phone plans, WhatsApp’s are free for the first 12 months; after that, a subscriber pays 99 cents a year.
Based on what Zuckerberg said was a goal of bringing WhatsApp subscribers to 1 billion, Facebook would be buying the mobile application for about 19 times estimated sales, according to data compiled by Bloomberg.
“While we see strategic merit, the acquisition is difficult to justify on metrics we use to value Facebook,” Brian Wieser, an analyst at Pivotal Research Group, said in a research note in which he downgraded the stock. “Supporting our more cautious view, concerns over costs of future acquisitions may weigh over the company in the near term.”
The deal is for $12 billion in stock, $4 billion in cash and $3 billion in restricted shares, according to a statement from Facebook. The purchase would dwarf Facebook’s acquisition of the photo-sharing service Instagram in 2012.
“Facebook is clearly taking out one of its main competitors,” Paul Sweeney, a Bloomberg Industries analyst, said in an e-mail. “They are buying 450 million loyal users and an extraordinary growth story, but at a staggering cost.”
The deal also raised questions about future acquisitions.
“I see them becoming a more aggressive acquirer when there are properties out there with sufficient scale that look scary to Facebook,” said George Zachary, a partner at Charles River Ventures. “I think they’re more focused on big deals that they can buy and control and hold off some competition.”
Koum co-founded WhatsApp with Brian Acton, 42, in 2009 after almost a decade as an engineer at Yahoo! Inc. In 2011, venture-capital firm Sequoia Capital invested $8 million in the company for a more than 15 percent stake that’s now worth about $3.5 billion, according to people with knowledge of the deal.
Zuckerberg first reached out to Koum in early 2012, when the two met for coffee in Los Altos, California, and ended up talking for more than two hours, according to a person with knowledge of the matter. They continued to get together, going out for meals and on hikes.
When the WhatsApp CEO went to Zuckerberg’s house in Palo Alto, California, for dinner on Feb. 9, they had their first serious conversation about a possible deal, the person said. On Valentine’s Day, Koum dropped by with chocolate-covered strawberries, which the two shared as they hammered out the price, the person said.
What they came up with would be the industry’s biggest purchase since Time Warner’s $124 billion merger with AOL in 2001, according to data compiled by Bloomberg. The $19 billion agreement also overshadows recent deals, including Google Inc.’s agreement to buy digital thermostat maker Nest Labs Inc. for $3.2 billion and Microsoft Corp. (MSFT:US)’s to acquire Nokia Oyj’s handset business for $7.2 billion.
Spending big won’t guarantee a payoff. Google bought Motorola Mobility two years ago for $12.4 billion, and agreed to sell it last month to Lenovo Group Ltd. for $2.91 billion. Google did keep the majority of Motorola’s patents and reaped other benefits including $2.24 billion from selling Motorola’s television set-top box unit.
“Facebook has the same challenges,” Yankee Group’s Howe said. “It remains to be seen if WhatsApp will change Facebook’s fortune for the better.”
Zuckerberg’s personal dealmaking touch doesn’t always work. Last year, Facebook pursued Snapchat, the social-networking app where photographs vanish after a few seconds, offering $3 billion. Zuckerberg sent e-mails asking for a meeting with co-founder Evan Spiegel, who rejected the entreaty -- and posted screen shots of the conversations online.
The Instagram purchase closed in 2012, and analysts have said the service has helped Facebook keep mobile users who tend to be younger and more inclined to post a picture than type out a message to share with friends. The app now has more than 150 million users.
Facebook shares (FB:US) rose 2.3 percent to $69.63 yesterday in New York trading. They dropped as much as 5.7 percent to $64.18 in extended trading on Feb. 19 after the WhatsApp deal was announced.
That Zuckerberg is pursuing such massive deals isn’t the best strategy, Evan Wilson, an analyst at Pacific Crest, said in a research note. It would be better for the company to grow organically or buy out competitors earlier at lower valuations, he said.
“After the Instagram acquisition, Facebook said, ‘We don’t plan on doing many more of these (acquisitions), if any at all’,” Wilson wrote. “After the news about a potential Snapchat acquisition and the WhatsApp acquisition, it’s clear that Facebook is not done.”
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