Facebook Inc. (FB), the world's largest social network, agreed to purchase mobile-messaging startup WhatsApp Inc. for as much as $19 billion in cash and stock, the biggest Internet acquisition in more than a decade.
The accord includes $12 billion in stock, $4 billion in cash and $3 billion in restricted shares, Facebook said yesterday in a statement. It's the largest Internet deal since Time Warner's $124 billion merger with AOL in 2001, according to data compiled by Bloomberg. WhatsApp has more than 450 million members, with 1 million users being added daily.
Facebook Chief Executive Officer Mark Zuckerberg, who bought photo-sharing service Instagram for about $700 million in 2012, has been adding applications such as messaging and news to court smartphone and tablet users. WhatsApp, which would be the company's biggest acquisition, competes with apps from Twitter (TWTR) Inc., Kik Interactive Inc. and Snapchat Inc., the photo-message startup that rebuffed a $3 billion Facebook bid last year.
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'They seem to have made a pretty strong statement with this acquisition,' said Debra Aho Williamson, an analyst at EMarketer Inc. 'Facebook has come to the realization that it needs a portfolio of apps to reach people with different use cases, different demographics, or different ways of communicating.'
Market Value
The deal prices WhatsApp at more than half the $31.5 billion market value of microblogging service Twitter, which has 241 million active users. The shares of Menlo Park, California-based Facebook fell 2 percent to the equivalent of $66.69 in German trading at 9:16 a.m. Frankfurt time. They lost as much as 5.7 percent to $64.18 in extended U.S. trading after the purchase was announced, after closing at $68.06 in New York.
'Facebook is clearly taking out one of its main competitors,' Paul Sweeney, a Bloomberg Industries analyst, said in an e-mail. 'They are buying 450 million loyal users and an extraordinary growth story, but at a staggering cost.'
Mountain View, California-based WhatsApp, which is popular in Europe, lets users send messages through its service on mobile devices based on different operating systems including Apple Inc. (AAPL)'s iOS, Google Inc.'s Android, Microsoft Corp. (MSFT) 's Windows Phone and BlackBerry Ltd.'s software.
Unlike traditional text messages, which consumers pay for through their mobile-phone plans, WhatsApp is free for the first year, and costs 99 cents a year after that. It also competes with Tencent Holdings Ltd. (700)'s WeChat in China, KakaoTalk in Korea and Line in Japan, as well as Facebook's own application, Facebook Messenger.
BlackBerry, Viber
The purchase of WhatsApp, which carries a $2 billion breakup fee, will probably avoid a U.S. antitrust challenge, Harry First, a professor at New York University School of Law, said in an interview. 'This is not the only message-sharing app for free. How hard is it to start up another one?'
BlackBerry, which owns a WhatsApp rival called BlackBerry Messenger, rose after Facebook's announcement. The smartphone maker climbed as much as 9 percent to $9.82 in late trading.
Tencent fell 3.1 percent in Hong Kong trading.
Rakuten Inc. (4755), the Japanese online retailer controlled by billionaire Hiroshi Mikitani, last week agreed to buy the Viber instant-messaging and calling service for $900 million. At that price, Rakuten is paying $3 for each of Viber's 300 million users, while Facebook is paying as much as $42 for each of WhatsApp's.
Ad-Free Service
'They just took out their primary threat and they recognize that overnight it makes them the leader in the mobile messaging space,' said Jim Patterson, CEO of San Francisco-based Cotap Inc., a messaging service for businesses. 'It was clearly the first mobile app other than Facebook that was going to get to 1 billion users.'
Jan Koum, WhatsApp's 38-year-old CEO, co-founded the company with Brian Acton, 42, in 2009 after almost a decade as an engineer at Yahoo! Inc. Venture capital firm Sequoia Capital invested $8 million in WhatsApp in 2011, for a more than 15 percent stake that is now worth about $3.5 billion, according to people with knowledge of the deal.
While Facebook has touted its progress adding more advertising revenue on mobile devices, Koum has been strict about keeping ads out of WhatsApp's messaging service.
Koum said in a statement yesterday on the company's website that WhatsApp will remain autonomous and operate independently.
'There would have been no partnership between our two companies if we had to compromise on the core principles that will always define our company, our vision and our product,' he said.
Valentine's Day
Zuckerberg first reached out to Koum in the spring of 2012, when the two met for coffee at a German bakery in Los Altos, California, and ended up talking for more than two hours, according to a person with knowledge of the matter. They have since met frequently, going to dinner and on hikes, said the person, who asked not to be named because the process isn't being discussed publicly.
Koum went to Zuckerberg's house in Palo Alto for dinner on Feb. 9, and the conversation became more serious. The two talked about how they could work together more closely on Zuckerberg's Internet.org initiative for connecting the world on mobile devices, and the conversation evolved into acquisition talks in the next 10 days, with Zuckerberg suggesting Koum join Facebook's board. On Valentine's Day, Koum came by Zuckerberg's house with chocolate-covered strawberries that the two shared as they hammered out pricing points, the person said.
'WhatsApp had every option in the world,' Zuckerberg said yesterday on a conference call.
Breakup Fee
Facebook, which held an initial public offering at $38 per share on May 17, 2012, is now worth $173 billion. The social network said it had $11.4 billion in cash and investments at the end of 2013. If the deal isn't completed, Facebook will pay WhatsApp $1 billion in cash and $1 billion in stock, according to the statement.
Facebook was advised by Allen & Co. and Weil, Gotshal & Manges LLP, and WhatsApp was advised by Morgan Stanley and Fenwick & West LLP.
To contact the reporter on this story: Sarah Frier in San Francisco at sfrier1@bloomberg.net
To contact the editor responsible for this story: Reed Stevenson at rstevenson15@bloomberg.net
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