Pay USD 19 billion for a sticky application
Facebook acquired WhatsApp for USD 19 billion. USD 16 billion is paid upfront with USD 12
billion in Facebook shares and USD 4 billion in cash. Additional USD 3 billion in restricted stock
that will be vested over the next 4 years.
WhatsApp is a very sticky App with 450 million users and 19 billion
inbound messages a day. Dividing USD 19
billion by 450 million users, that implies Facebook paying USD 42 for each
user. WhatsApp is still growing its
client base at 1 million a day. USD 19
billion is a lot of money. To put it in real
world terms, HSBC just reported its 2013 pre-tax profit at USD 21.6 billion. It would have taken a global banking giant HSBC
254,000 staff 11 months to make enough to buy a 55 employees startup.
Why and how could it happen? First of all, Facebook can afford it at USD
180 billion market capitalization. Its
share price has gone up 158% in one year at USD 70 level and still a lot higher
than its USD 38 IPO price in May 2012.
At USD 70, it is trading at 120 times Price to Earnings ratio (P/E
ratio). Market expects Facebook 2014 to
double in 2014. With USD 15 billion of
the purchase price paid by Facebook shares, it is kind of paper money. Google, Microsoft and Yahoo are trading at
33.3, 13.2 and 29.6 times Price to Earnings Ratio respectively. When it comes to using shares to purchase
business, Facebook has a huge advantage as it is almost using fantasy money to
buy dream. If Microsoft, with low P/E
ratio, issuing new shares to buy WhatsApp, it will be like swapping Oxford
Street property for a gold mine in the moon.
Secondly, Facebook should buy WhatsApp to diversify
and increase its stickiness. We have
seen MySpace (or some may not have even seen it at all) disappearing from
people’s PC screen without a trace.
Facebook has done well to survive the users’ behavior change from
desktop to mobile platform. However,
users’ behavior in the tech world is as constant as the behavior of
teenagers. Kids in school have never
heard of Ericsson as a mobile phone brand.
Blackberry is going to be known as a fruit again instead of a mobile email
device. Facebook needs to survive and
compete against Google who has everything with an “e”, Microsoft Skype, LINE
and WeChat from the East. Facebook needs
to stay sticky with people and attract fingerprints on its icon on people’s
mobile device. Instagram has proved to
be a success and the USD 1 billion paid in 2012 looks like a bargain now. Imagine if WhatsApp is not bought by
Facebook, but Google, Microsoft or Yahoo, it will make Facebook future journey
a bit darker if not wet and slippery.
Any big news on the planet is the sticky situation in
Ukraine. Not to look at the politics but
the economic impact, Ukraine is likely to cost the EU and Russian billions of
Euro. Apparently, an EU official has
mentioned EUR 20 billion as a conservative estimate of potential
assistance. The good news is that after Ireland,
Greece, Portugal and Cyprus, the EU has become pretty experienced when it comes
to bailout a country. So money is
probably not the biggest issue here but the chess game between EU and
Russia. The Ukraine episode may
encourage if not force EU to be leaning towards a more generous monetary policy
in 2014 or may even lead to another “whatever it takes” statement. This could be good news for the European
stock market. The EUR has also shown
some strength in February at USD 1.375 to a Euro as of 25 February. Eurostoxx 50 Index is safely at 3,150 level, just
within walking distance from its January high of 3,169.
At the other side of the world, China is letting
its currency, Renminbi, to swing. The
currency of the second largest economy in the world has dropped to six-month
low against the dollar. It is dropped
about 1.2% in 3 trading days from 19th to 21st of
February. This is the biggest correction
in Renminbi strength since 2011. With US
and Europe showing sign of economics stability, the Chinese probably thinks it
is their turn to ease its currency strength to boost exports. Investors like Soros have mentioned his
concern over China debt market. The best
way to resolve a debt problem is to make money from exporting goods or services
(or print more debt like US). If
Renminbi could ease or at least stop appreciating against the Dollar, it helps
China exports to some extent.
