In the latest string of big companies buying smaller and successful companies, Facebook bought mobile messaging firm WhatsApp for a whopping $19 billion in cash, bonds, and equities. Facebook announced on 19th February that it reached an agreement with WhatsApp’s to acquire the popular messaging service. This is the social media website’s biggest acquisition till date beating its $1billion buyout of Instagram. WhatsApp’s founders Brian Acton and Jan Koum will join Facebook as its board of directors.
WhatsApp have a user base of more than 450 million dedicated users. When compared to Facebook’s reach of around 1.2 billion it seem quite small but considering the fact that the messaging app gathered this many users in only four years and Facebook only had around 145 million in its first 4 years, WhatsApp has been quite successful.
Why buy WhatsApp
Facebook has a monopoly in social media segment. So much so that it now a common name everywhere. This popularity in itself is affecting Facebook’s ability to grow more and into more segments. So the only option left is to try acquiring successful enterprises that are already established in the desired segment and lack a big financial backing. Buying WhatsApp gives Facebook such a kind of foothold in its mobile messaging segment which has recently started to see incoming of big investors, for example Chinese Tencent backed WeChat.
But why such a huge cost?
The application may have 450 million users but for the most part the application has been free to use and without advertisements. Only in past year the company have announced to rollout a price tag for the application and that also for a modest fee of a dollar per year, and you only have to pay after using for a year. A question immediately rises about the point that why Mark Zuckerberg shed such a huge amount for a company that is not making heavy revenue for now.
The answer to this puzzle lies in the way the company is bought. If we look closely at the deal it’s more like a merger than an acquisition. Except $4billion in cash, which is still a huge amount, rest $12billion are in the form of Facebook shares, and other $3billion are in the form of bonds to founders and employees that are to be paid in the course of 4 years. In addition, WhatsApp’s founders Brian Acton and Jan Koum are now in the board of directors of Facebook. All this suggests that they Facebook has effectively merged with WhatsApp with both parties having interests in each other’s companies.
The future
We may see advertisements in WhatsApp. It’s a huge possibility. Just like Google’s move to add its Advertisement initiative in Gmail, Facebook may start integrating Facebook Ads with WhatsApp, like it did with Instagram. But if reports are to be believed that is not the case, atleast for a few years. The CEOs of Facebook and WhatsApp says they would be focusing on growth, and with the backing of Facebook’s financial support they don’t even need to roll out $1 charge that they were thinking of rolling out. So WhatsApp is add free for now and for the time being still free of cost. But let’s see what the future holds.
Rachit Agarwal
