The acquisition of Whatsapp for a whopping USD 19 Billion (biggest web acquisition in over a decade) begs a question as to exactly

what is whatsapp and is it really worth that much. Whatsapp Service Provided: Send and Receive free SMS and MMS text messages on smartphone. Cross platform messaging app available on iPhone, Blackberry, Android, Windows phone and Nokia. Create groups, send each other unlimited images, video and audio media messages

Revenue Stream: Ad-free service, hence possible huge revenues from Ads eliminated. Free usage for first year of subscription and 99 cents/year/user after that.

Whatsapp has done for messaging what Skype has done for voice and video calls Jim Goetz, Sequoia Capital Facebooks Acquisition of Whatsapp Facebook paid around USD 42 per user in order to acquire Whatsapp which has a user base of 450 million worldwide. Was this price justified? How is Facebook going to generate revenues to justify this price tag? Will it strengthen the prominent Revenue stream of Facebook? 1. No synergy between Revenue streams: Facebook depends mainly on advertisements and promotions for its revenues. Whatsapp on the other hand believes in providing its users with an advertisement free messaging experience. Whatsapp gets its revenues from subscription fees which it charges to its customers after one year of free service. 2. Acquisition Price V/S Whatsapp Revenues: In 2013 Whatsapp reported revenues of around USD 20 Million whereas the price of acquisition was USD 19 Billion. Given the huge investment and the present expected return on equity of 8%, Whatsapp is expected to generate USD 0.08*19 = 1.52 Billion in Net income. Given 30% Tax rate, Net expected revenues are USD 2.18 Billion. With Whatsapps revenue stream, it would require 2.5 billion users using it on a continuing basis. With the current 450 million users and extensive competition it is a tough ask. 3. Large User Base & Fastest growth rate: Whatsapp has reached 450 million users faster than any other social networking website (as shown in the below graph). Mark Zuckerberg expects it would grow to be a billion user company very soon. Although Facebook cannot generate revenues directly from Whatsapp, it can increase its own customer base by attracting Whatsapp users to Facebook and then generating revenues through advertisements and promotions.

4. Markets View: From the viewpoint of the market, Facebooks acquisition is a positive as reflected by a jump in its stock price right after the announcement. To see what the market depends on while valuing such businesses lets look at social media companies and their performance. As shown in Table 2. All the firms had different performance across different parameters. A correlation study between the Markets value and the parameters associated as shown in Table 3. Reveals the following: Number of users is dominant driver: The key variable in explaining differences across companies. Zillow had a 12% rise in stock price and Twitter had a 25% drop based on news that Zillow added more users than Twitter in the period. At whatsapps growth and user base, it might well be worth the money. User engagement: Sites which engage customers for a longer while are valued more. Whatsapp has almost 70% of its users using the service actively throughout the day. Even by this parameter Whatsapp stands to be a good buy. Predictable revenues: Firms with predictable subscription revenues like Whatsapp are priced higher than those with unpredictable advertising and retail revenues.

Table 2: Market value of Social media companies

Table 3: Correlation between different factors

CONCLUSION Based on above comments Whatsapp might well be worth USD 19 Billion but it largely depends on its future performance and rising competitors. Facebook has to find ways to monetize Whatsapps large presence and gain revenues on a regular basis to justify the purchase.