Facebook acquires Whatsapp. Is it stupid?

Shaleen Sharma (Founder and Content Admin @ FlipSquAir.com) (96 Points)

20 February 2014

Everybody is in a race to break the news of an Impending Facebook takeover of Whatsapp for $19 Billion. Just to win the race, many posted articles with several typos, what a shame!! Nearly everybody quotes the same stats of 450 million Users of Whatsapp and a 70% user engagement and not much beyond that. That's a pile of repetitive e-waste!

But as always, Life Peddler ends up delivering such detailed yet simple articles, aka great articles.

So lets proceed with our analysis.

Anyway, the other surprising factor is that most people are raising eyebrows at the takeover and marvelling at the $19 Billion tag, which is odd. So lets see why its not that odd!

To clarify to you:

Out of the $19 Billion figure:

$12 Billion will be paid in Facebook Inc Shares
$3 Billion in restricted stock to be vested over four years.
$4 Billion in cash

So what is the Logic in taking over Whatsapp?

Its a Cheap Deal!

Look! the closest competitor of whatsapp is Wechat. Wechat is valued at about 30 Billion and has about 280 Million users world wide. That comes to a rough cost of $107 per user.

What is Facebook paying?

They are paying $19 Billion for 450 Million users that works around $42 per user. Now that is cheap!

But that's not enough data to justify the deal. So lets look deeper.

Can Facebook Afford it?

Yes they can!.. How?

If you were to look at the details of the purchase consideration up to $15 Billion is paid by shares. And $4 Billion is to be paid in cash.

Now $4 Billion in cash is a lot of money! But if you were to look at their financial report for the Year ending December 2013, you will notice that they have free Cash Flows of $2.85 Billion.

Also to note that Facebook's Net profit increased from $53 Million in 2012 to $1500 Million in 2013.

Which in simple terms means, financing the deal is well within the resources of Facebook.

Will it Dilute Facebook's Earning per Share?

For the year ending December 2013 Facebook has registered a Return on Capital Employed (Inclusive of long term liabilities) of about 9.2% . Earning per Share is about $0.60.

Now the next analysis is a little complicated, so read patiently!

It is important to note that Whatsapp is a highly under-monetised Organisation, which means it purposely earns well below what it is capable of earning. Whatsapp only survives on a dollar a year subscripttions, i.e there is no advertising revenues or data selling going on. (That too is free to the user for one year!)

Also currently Whatsapp has a staff of only 55 people. Extremely!! Low cost structure!

Whatsapp is adding 1 million users every day!! i.e about 800 million new by the end of 2014.

Which means a turnover of 800 million by just charging on Dollar per Year model.

Even if you were to consider an operating cost of 100 Million projecting a future team of 55 to 100 employees, that leaves a profit of 700 Million just for 2014.

Which gives you a return of 3.6% with growth prospects of 70% to 80% per year for at least 5 more years.. Now that's suddenly a good long term deal!

Yes it will dilute EPS in the short term but provide huge profits in years to come.

Facebook just hit ~~Two~~ Three Birds with One Stone:

One:

Facebook just ate up an organisation which potentially could end up being a major challenge to it in the coming years. Its not me who says it, Facebook itself recognises it. Read this statement from their 2012 annual report:

"We face significant competition in every aspect of our business....We compete with the following:

Companies that develop applications, particularly mobile applications, that replicate discrete capabilities we provide, such as photo-sharing, messaging, and micro-blogging.
Companies that provide web- and mobile-based information and entertainment products and services that are designed to engage users"

Two:

They just took one step on countering Google's increasing presence over the Internet. Facebook might never be able to reach the size and proportion of Google but it is necessary that it holds its dominance in the Social Media Niche.

Three:

Future lies in the mobile phone platform. If you haven't already noticed, Facebook grew on the Mobile Phone platform (on basis of Mobile Monthly Active Users) by 57% through 2012 and by 40% through 2013.

And this trend is only set to get acute in time to come considering Whatsapp's own phenomenal growth over the past two years. So this deal is definitely one for the future.

To conclude.. even though overeager bloggers are wondering and marvelling at the size and dynamics of the deal. The truth is that the deal makes perfect business sense, and is well within the means of Facebook.

Life Peddler & Shaleen

"I am a believer in multidimensionalism and the fact that variety is just so! fascinating!! I justify it by ideas that are insane, hilarious and some times.. simply compelling. It's only a coincidence that I write great and original articles"

Okay.. that's a little cocky.. haha.. but hey! Its true!!.... Whats next?? Subscribe!!