Facebook– Whats up?

There is a lot “up” with Facebook to justify spending $19bn of shareholder’s money on WhatsApp.

• Facebook will pay $4bn in cash, $12bn in shares and $3bn in restricted stock to acquire WhatsApp, trumping Google’s bid of $10bn.
• My current estimate is that WhatsApp currently has around 475m users which means that Facebook is paying $40 for every user who generate $1 per year in the best case scenario.
• My suspicion is that in fact it earns far less than that as it has no way of collecting the annual fee for many of the users of the service.
• My estimate is that revenue is in fact $0.5 per user per year and I think I am being generous.
• This gives me a fair value of WhatsApp of around $4bn or so meaning that Facebook is going to have to move mountains to earn a decent return for its shareholders on this acquisition.
• However, I am sure that Facebook’s motives go far beyond instant messaging and in fact I think that this acquisition is about Digital Life.
• WhatsApp is not about to increase Facebook’s user count but it will give it a dominant foothold in hottest Digital Life service at the moment: instant messaging.
• Facebook has a very strong position in one segment (social networking) of Digital Life but it has very little outside of that.
• Furthermore, all of its efforts to build new services outside of that space have been total failures.
• In order to secure long term revenue growth it must do well in encouraging its users to do other things with its service other than social networking.
• Instant messaging on its own is a small piece of the Digital Life pie but I suspect that Facebook has big plans for this platform.
• LINE, KakaoTalk and others have extended their IM services into platforms that do other things like gaming and this could be very interesting for Facebook as gaming on smartphones is extremely important.
• RFM research shows that users spend 32% of their time on smartphone playing games and if Facebook can use WhatsApp like LINE then this could do wonders for the value of its ecosystem.
• Strategically, I don’t have a problem with this acquisition as something needed to be done about Facebook’s position in Digital Life and the organic options were not working.
• However, the valuation paid is so high that I really struggle to see how investors will ever see a positive return on this investment.
• It is a great comfort that only $4bn is being paid in cash (which ironically I find to be about the right value) with the rest being paid in already pretty expensive paper.
• I suspect that this was a factor in the acquisition price.
• Had it been all cash, with Google not in contention then I suspect WhatsApp would have got something more like $10bn.
• Facebook’s strategy is right in making this acquisition but much greater value for the shareholders would have been generated if it acquired KakaoTalk.
• KakaoTalk has superb monetisation already and probably would have been much cheaper but then the two CEOs would not have had such cozy dinners together.