Facebook to buy Whatsapp for 19 billion dollars
From the numerous articles throwing mind numbing numbers of How Whatsapp was gonna become the next big thing with its 450 mn users, so many messages,pics.... I could make out two reasons for the acquisition
Facebook is paying $42 per user with the deal, compared with a market value per user of $170 for Facebook and $212 for Twitter, Deutsche Bank's Ross Sandler said in a note.
Well, It looks great! when you put it that way but aren't you assuming Whatsapp user can be monetized the same way as a facebook user (believe me, it's tough and I will tell why) and a whatsapp user is not already a Facebook user. I believe that is too long a stretch...
Let us talk about profits, if you don't mind– Facebook makes profit of 2.25$ per user per year (2.7 bn pretax profit from 1.2 bn users). How much does Whatsapp make per user?
From a forbes article, which says 50 mn dollar annual revenue from 450 mn users.That’s .11 dollar revenue earned per user per year. Profits not disclosed, but surely will be lesser than revenue. So let's work with this only assuming tooth fairy pays for the expenses of Whatsapp.
I am reminded of this lesson from Warren Buffett citing caution to invest in businesses which demand a lot of investment but make little money from those investments.
1. Facebook is buying it to earn more from the increased usage and new users it gets?
The most convincing comment on the topic is:Facebook is paying $42 per user with the deal, compared with a market value per user of $170 for Facebook and $212 for Twitter, Deutsche Bank's Ross Sandler said in a note.
Well, It looks great! when you put it that way but aren't you assuming Whatsapp user can be monetized the same way as a facebook user (believe me, it's tough and I will tell why) and a whatsapp user is not already a Facebook user. I believe that is too long a stretch...
Let us talk about profits, if you don't mind– Facebook makes profit of 2.25$ per user per year (2.7 bn pretax profit from 1.2 bn users). How much does Whatsapp make per user?
From a forbes article, which says 50 mn dollar annual revenue from 450 mn users.That’s .11 dollar revenue earned per user per year. Profits not disclosed, but surely will be lesser than revenue. So let's work with this only assuming tooth fairy pays for the expenses of Whatsapp.
So you think you can earn 2.25$ profit (20 times more profit)(Remember profit! Here revenue is mere .11 dollars ) from a Whatsapp user.
All the while you are assuming Facebook user and Whatsapp user inhabit distinct worlds, So they cannot be the same. Now Would you say Facebook is paying cheap?Why you cannot easily make 2.25$ profit from a Whatsapp user?
Currently Whatsapp revenue source is membership fee paid by its users 99 cents a year. To earn 2.25$ profit. It has to go up by more than 20 times. Will I pay more than 20$ to use Whatsapp? I am not so sure.
Another source of revenue could be ads but there is a problem too.
Whats app is a mobile messaging service like Yahoo Chat, Google Hangout etc. and do not show any ads because well, the chat interface does not have the real estate for putting an ad between conversation.
Another source of revenue could be ads but there is a problem too.
Whats app is a mobile messaging service like Yahoo Chat, Google Hangout etc. and do not show any ads because well, the chat interface does not have the real estate for putting an ad between conversation.
Facebook earns from displaying related ads among your posts (Facebook had to bring ads from the fringes to centre to create more user interaction with posts. See the Suggested posts in your Newsfeed!)
So the big question is Will I stay with Whatsapp if it started showing ads to earn revenue while other messengers do not?
2. Facebook is buying Whatsapp to remain the leader?
Some say the fast pace of growth of Whatsapp was a threat to Facebook.User engagement over Whatsapp was higher than Facebook (by 13%). So Facebook bought it to remain a leader.
Now I think if you pay 19 billion dollars to remain in business where you earn revenue of 7.8 bn dollars. Your forego more than 2 years of revenue to stay the leader. That's a pretty expensive deal, if you ask me.
I am reminded of this lesson from Warren Buffett citing caution to invest in businesses which demand a lot of investment but make little money from those investments.
"There are businesses which continue to demand sizeable investment from time to time just to remain in business. They are not worth investing."
So Yup! I am not gung ho over the acquisition.
It reminds me of Microsoft's acquisition of Skype for 8.5 bn dollars. Wonder, Was there an article of jump in Microsoft profits after!
Source links:
Source links:
- Why Facebook is buying WhatsApp for a whopping $19bn http://timesofindia.indiatimes.com/tech/tech-news/internet/Why-Facebook-is-buying-WhatsApp-for-a-whopping-19bn/articleshow/30714970.cms
- Wall Street sees sense in Facebook's $19 billion WhatsApp purchase http://www.reuters.com/article/2014/02/20/us-whatsapp-facebook-research-idUSBREA1J0Z720140220
- Facebook's new 10-year plan? SMS -- aka WhatsApp http://www.forbes.com/sites/gordonkelly/2014/02/20/5-key-reasons-whatsapp-is-worth-19bn-to-facebook/
- Why Microsoft Is Buying Skype for $8.5 Billion
http://gigaom.com/2011/05/09/why-microsoft-is-buying-skype-for-8-billion/
Exactly, this investment, by Facebook, acc to me, is driven by the fear that Facebook messenger's users will eventually shift to Whatsapp if they don't acquire it. So, this $19 bn deal isn't really an investment, it can be considered as a maintenance capex. :P
ReplyDeleteAcc. to WSJ Facebook is paying Whatsapp $42 per user, which means, as my Whasapp shows 1 year subscription comes at INR 53.19, Facebook will have a payback period of more than 42 years, considering all users pay for one year subscription today (I haven't paid a single penny to Whatsapp in past two years, it keeps extending my subscription period). Clearly, deal isn't done keeping the profits in mind.
Biggest gainers will be the Venture Capitalist who have put $8 mn in Whatsapp till now, followed by the two Advisers of the deal (Morgan Stanley, and Allen & Company) which will make approx ~$80 mn from this deal.
You can visit these links for more details:
http://on.wsj.com/1hayPJR
http://dealbook.nytimes.com/2014/02/19/advisers-on-facebook-deal-could-earn-more-than-80-million/
Remember what Buffett said about internet companies?
"For the final exam, I would take an internet company and say, 'How much is this worth?' And anybody that gave me an answer I would flunk."
People do dumb things in acquisitions, don't they? Recall Tata acquiring Corus, or Hindalco acquiring Novelis. :P
You can refer Prof. Bakshi's ppt '16 Lessons I Learnt About M&A' to gain more, here: https://db.tt/qQL5ySrQ :)