According to Tumblr, I could buy the Hubble Telescope, the NBA or the top 20 football clubs in the world for less than what Facebook paid for WhatsApp. The price tag was a mind-boggling, eye-popping $19 billion and while Wall Street seems OK with the number (both analysts and the market so far have given it the thumbs up), many a man on the street seems stunned by the price tag.
In my opinion, this acquisition makes a lot of sense:
WhatsApp is a highly profitable company with 450 million users and in the foreseeable future can be expected to reach an even larger user base of 1 billion users or more. (In fact, news of the acquisition has caused a flurry of downloads amongst my office mates, and I suspect others as well.) While Facebook’s own messaging application couldn’t be called omnipresent, WhatsApp’s level of usage is extremely high, especially outside the US.
In Germany, almost half of the population, 30 million people, are using WhatsApp on a regular base. Understanding those messages gives lot of insights into the desires and interests of an important economy like Germany. Using text analytics to add new user insights could improve FB’s ability to offer personalized ads to their base. If the additional data leads to better predictive models and better placed ads, and if this leads to only a 10 percent revenue increase for FB, this acquisition will pay off handsomely.
FB’s market cap is currently ca $170B based on $8B in revenues. Increasing revenues by 10% could lead to market cap increase of 10% or more – or $17B — very close to the sale price.