The focus late this week was on Facebook (FB), which rose 2.3% after announcing the acquisition of WhatsApp, a mobile messaging company with a 450 million user base. The $16 billion purchase price included $4 billion in cash and $12 billion in FB stock, along with special registered stock issuance.
While there were some concerns about the price that initially weighed on FB shares, the Street turned upbeat on the strategic merits of the deal given WhatsApp’s disruptive technology, mobile engagement, rapidly growing user base and favorable geographic and demographic profile.
Personally, I love the FB deal and think that it will pay off for FB shareholders. One of the principles of modern business is that you have to develop the next business that destroys your old business before your competition does. You have to get out in front of the tide of innovation. That is what Facebook did with Instagram, and that is what it is doing with WhatsApp.
FB has determined that it is in the business of connecting people who want to share stuff about themselves — and selling those users to advertisers. It doesn’t matter if that platform is on the desktop, as Facebook was originally, or is done with photos alone, as with Instagram, or with instant messages with photos, like WhatsApp.
This is a smart move by Facebook, and once investors got over the seemingly high price tag, they realized that the deal gives Facebook a new lease on life…until the next big thing comes along.
Here’s the thing.
WhatsApp is a mobile messaging app for Apple (AAPL) iPhones and Google (GOOG) Androids that is one of the fastest-growing young companies on the planet, or any planet, for that matter. Of its 450 million current users, 72% are active every day. And those users share 400 million photos a day, which is a staggering number. Consider that Instagram says that its users only share 55 million photos a day, while Facebook users share 350 million a day. So that 400 million number is mind-blowing.
You should download WhatsApp and try it; it’s a very nice messaging interface, though you can only interact with other people who have it. But that is apparently a lot of people, particularly in Europe. WhatsApp does this with just 32 engineers, which shows that the lean and mean start-up culture is alive and well in Silicon Valley.
What I love about this deal is that it will put a fire under young engineers at other companies to go out and create their own businesses that they can sell for $16 billion. This is not far-fetched. There are thousands of smart men and women out there with great ideas who slug it out day after day to make a paycheck and yet harbor ideas that could pay off big. People always need to be reminded of the potential for glory, and this is the kind of event that could unlock that nascent potential.
Moreover, it puts a floor under the valuations of other high-growth start-ups and public companies. If a smart real-money buyer like Facebook is willing to pay a seemingly very high multiple of sales to acquire growth and scale up, that immediately boosts the value of comparable firms. It’s just like if someone pays an extraordinary sum for a special house in your neighborhood; it puts a new floor under most of the other similar homes.
And it’s a big positive until proven otherwise.