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Why Facebook Is Blowing $19 Billion On WhatsApp


Even in this era of multibillion-dollar valuations for tech startups that have barely moved out of the founders’ parents’ basement, the $19 billion Facebook is paying for the mobile messaging service WhatsApp seems simply insane. But that’s what Facebook likely will be spending to acquire the latest–well, not even actually the latest–social network and communications service. The company today announced the deal, which includes $12 billion in Facebook stock, $4 billion in cash, and up to $3 billion in restricted Facebook stock units to be granted to WhatsApp founders and employees over a four-year vesting period.

Why so much for a service that a lot of people have never even heard of? Because it’s growing really, really fast–faster, in fact, than just about any similar service to date, including Facebook. More than 450 million people are using the service monthly, and 70% of them are active on any given day, according to Facebook’s press release. More than 1 million more are registering to use it every day. Most stunning, WhatsApp messaging volume is apparently approaching the entire worldwide SMS messaging volume of mobile carriers. That’s the kind of growth Facebook, whose own messaging service has been growing rapidly but nothing like that, simply can’t ignore.

Still–$19 billion? Really? Some people thought Facebook CEO Mark Zuckerberg was crazy to offer $3 billion a few months ago for Snapchat, which has even more buzz than WhatsApp especially among the young people the No. 1 social network seems to be losing. If I’m not mistaken, it’s more than Google GOOG -0.69%, Microsoft MSFT +0.17%, Apple, or anyone else I can think of has paid for an acquisition. And Google just sold off its biggest acquisition, Motorola. (Well, there was AOL-Time Warner, long ago in Internet time, but you know how that turned out.) It’s difficult to put a price on remaining relevant or even surviving long-term, so perhaps $19 billion isn’t that big a sum to pay. And it’s buying not only younger users, but users around the world. Given that everyone in the U.S. who wants a Facebook account surely has one, the company needs to make sure it goes deep into Europe and Asia if it wants to keep growing–and fulfill Zuckerberg’s over-arching goal of connecting everyone in the world.

And after all, it’s mostly stock–funny money in a sense. So why not spend it on ensuring a future for your company? But no, I can’t say that with a straight face. It’s just too hard to justify it on any kind of near-term factor. Despite Facebook’s waning cool factor, the company doesn’t seem to be in significant danger. It’s one of the most profitable companies in the world at least measured by profit margin. Investors aren’t so sure about the deal either. Shares are down about 3% in after-hours trading, though that’s a fairly mild reaction to such a big, surprising deal.

The fact is, we can’t know today if this is a good deal for Facebook or not. Clearly Zuckerberg sees a big piece of Facebook’s future in WhatsApp, because he’s paying more than 10% of Facebook’s market cap for it. And he can’t do that many more times–perhaps any more times, at least for awhile. In a few years, Zuckerberg may well look smart, if his company ends up even close to as dominant a place for people to share their lives as it is today. It’s just hard to justify the deal on anything but faith right now.