Pay USD 19 billion for a sticky application

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 19^th to 21^st 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.