Whatsapp and FacebookIn one of the biggest deals of the year, Facebook Inc. concluded a deal to snap up WhatsApp, the premier mobile messaging startup. Tech circles were surprised and astonished by the mindboggling $19 billion deal in both stock and cash options. The world’s largest social network made this deal to bolster its own market presence and popularity among the younger generation. WhatsApp has about 450 million users globally and the acquisition of the same made sense with regard to bolstering the company’s market presence. However, many tech experts and observers at Silicon Valley were stunned by the huge price of the deal. However, the deal is indicative of Facebook’s overall goal with regard to winning over a market that rests on messaging alone which is somewhat indispensable in today’s times.

The USP of messaging apps like WhatsApp lies in the fact that they combine networking and text messages and users can send videos, pictures and texts in tandem. There is no need to spend any money with regard to fees charged by intermediate wireless mobile service providers. Alongside, this deal will also help Facebook tap into the growing market of teenagers and young adults who prefer messaging services like these over mainstream social networks. The network for instant messaging has shot up like never before.

WhatsApp is incorporating almost one million users into its database each day, as per statistics revealed by Mark Zuckerberg, the CEO and co-founder of Facebook. WhatsApp according to him will be the ideal foil for the existing messaging and chat services provided by Facebook and will definitely bring up newer tools for the Facebook community. There are two different user types served by WhatsApp and Facebook and the company will remain committed to investing in both markets according to Zuckerberg. The acquisition of smartphone based messaging apps will also help Facebook tap into emerging markets in Asia, North America and Europe.

The deal also includes the inclusion of the Chief Executive Officer and co-founder of WhatsApp, Jan Koum on the board of Facebook. The entire deal is worth about $16 billion both in stock and cash options to be payable by Facebook and an additional $3 billion in restricted units of stock will be paid to the founders of WhatsApp including Koum. This $19 billion deal is the biggest tech deal in history after HP acquired Compaq in the year 2002 for $25 billion. According to market experts, this is best possible deal that WhatsApp could have obtained in recent times. As a result of the formal announcement of the deal, Facebook’s shares went down by a staggering 5%, closing at $64.70 from $68.06 on the NASDAQ which was unexpected to say the least.

Approximately $4 billion in cash will be paid by Facebook while $12 billion worth of stock options will be transferred almost immediately. This comes after the $1 billion acquisition of Instagram, the image sharing application which now seems like small change! The $1 billion price tag for Instagram was already considered too high going by the 30 million users that the app possessed when the deal was concluded. To keep investors and users from worrying, Facebook pledged a $1 billion break-up fee in cash in case the deal does not materialize midway. The WhatsApp service and brand will also be retained as per the promise made by Facebook. For the deal, Allen & Co were the advisors to Facebook while WhatsApp hired the services of Morgan Stanley. Even though experts are still surprised with the overall value of the deal, experts like Paul Kedrosky, a leading investor, feels that the deal makes a good deal of sense. This will firstly leave WhatsApp free from the clutches of Google and will lessen the competition in the market.

Facebook will anyway take on the WeChat and Line apps in multiple markets and the acquisition of WhatsApp will only give Facebook a competitive advantage which will pay dividends in the long run. However, monetization is a bit of a puzzle regarding WhatsApp though experts feel that an advertising system will be created in the long turn. This huge, mega deal will strengthen Facebook which has 1.2 billion users of its own. The messaging app was created by Jan Koum and Brian Action in 2009. According to Koum, the high user engagement levels and staggering growth of WhatsApp will only find momentum with this deal. According to Koum, nothing mattered more than creating a trendy app which would be used by almost everyone. According to him, the deal will give wings to WhatsApp’s fledgling expansion and growth plans.

Facebook has promised as mentioned, that WhatsApp will be an independent company, retaining its headquarters in California. The product will stay free from advertisements now and both companies will be looking at growth only for some years to come. Thereafter, a revenue model will be figured out which will not involve direct push selling of advertisements through the application. There are no changes expected as far as WhatsApp is concerned, though the company is toying with the idea of cancelling the $1 annual charge as Facebook is not too keen on expanding customer subscriptions rapidly. However, WhatsApp may decide not to collaborate with companies that are direct competitors of Facebook. A case in point: Instagram’s non integration of Twitter in the year 2012.

Here’s why this deal will actually work for Facebook:

  • The photo sharing market will be captured by Facebook. More people share on WhatsApp than on Facebook
  • Facebook will be a conglomerate in the social media sphere in every sense of the term with Instagram and WhatsApp under its belt
  • Facebook will not lose out on customer attention and be able to compete with newer and more innovative mobile-only apps
  • Facebook will be able to expand its market presence in Europe and other emerging markets in Asia and other parts of the world
  • Facebook can tap into private social and user data which was invisible to it earlier and this can form the base for core advertising solutions from Facebook

Here’s hoping for a productive collaboration ahead!