Mark Zuckerberg

CEO of Facebook

Jan Koum
CEO of WhatsApp

Presented by: Ebenezer Benjamin

Jatin Aggarwal
Neha Jain
Priya Upadhyay

Facebook WhatsApp Deal

19 BILLION DOLLAR
DEAL
WHATSAPP

FACEBOOK
User Base-1.23B

User Base-0.45B

M-cap-170.55B$

M-cap - N/A

Revenue-7.9B$

Revenue-??

Net Income-1.5B$

Net Income-???

Listed on Nasdaq

CEO-Jan Koum & Brian Acton

CEO-Mark Zuckerberg

Acquiring WhatsApp
According to a filing with the Securities and Exchange
Commission :
On February 19, 2014, Facebook had announced the landmark
deal to buy WhatsApp for US$ 19 billion.
It includes:
-USD 4 billion in cash
-USD 12 billion worth of Facebook shares
-USD 3 billion in restricted stock units
Facebook CEO Mark Zuckerberg announced that WhatsApp will
continue to operate independently.
Jan koum to join BOD of Facebook.

Purchase Consideration

FB shares(12 Billion
US $)
Cash(4 Billion US $)

Restricted Stock(3
Billion US $)

Key statistics (whatsApp)

>450M monthly active users. On a given day
growing by >1M registered users per day
WhatsApp messaging volume approaching
entire global SMS telecom volume(19B sent
& 34B received per day.

>600M photos uploaded per day

>200M voice messages sent per day
>100M video messages sent per day
>100% YOY growth for all of the above

Facebook Whatsapp comparison

Parameters

Facebook

Whatsapp

Active users

1.23B

0.45B

Daily Users

0.76B

0.32B

Start Year

2004

2009

Employees

6337

55(32 are Developers)

Messaging volume approaching the entire global telecom

SMS volume.
Currently adding more than one million user per day.

WhatsApp extraordinary growth in

users

Facebook Stock Movement.

Facebook came with IPO at 39$/Share.

123 Billion User0.76 Daily Users in which 60-70% access
FB through Mobile .
FB introduced its App in 2012.
FB Acquired Instagram for 1Bn$.

SWOT analysis (whatsApp)

Loyal customers
Market share leadership
Available for all platform
No need to remember PINs and
usernames
No need of login/logout
Free voice calls

Advanced technology
Recognized application
Modernization of people
Increased demand of
smartphones

strengths

opportunitie
s

weakness

threats

Not diversified, because

other applications offers the
same service and function as
social media
Only works with a data plan
or wifi.

Competitors like Wechat,

Skype, line
Similar applications and free.

Relative Valuation Approach.

Verizons deal to buy 45% stake in verizons wireless for

130 Billion.

Valuation is Huge ,But valuation is about FUTURE.

Future of WhatsApp

If Whatsapp collect 2.85$ per year from every customer it

will get to verizon valuation.
Will you pay 2.85$ after 5 year?? As on today it seems to
be impossible ,but in future it may happen.

Comparison Analysis

What's in it for Facebook?

(Benefits enjoyed by
Facebook)
To reclaim the teen demographic, a key group of users
whohave grown disinterested in Facebook
Diversify with a broad based of mobile services.
A decrease in daily users, specifically among younger teens."
Areport from Piper Jaffrayconfirmed that trend, finding that
only 23% of teens cite Facebook as the most important social
network, down from 33% six months ago and 42% a year
before.
The WhatsApp acquisition also propels Facebook to the top of
mobile messaging that it has so far failed to tap.

Continued
Facebook was playing the pricing game(Number of users is
the dominant driver), and that recognizing that this is a market
that rewards you for having a greater number of more involved users,
they have gone after a company (WhatsApp) that delivers on both
dimensions.
Here is a very simplistic way to see how the deal can play out.

Facebook is currently being valued at $170 billion, at about

$130/user, given their existing user base of 1.25 billion.

If the WhatsApp acquisition increases that user base by 160 million

and the market continues to price each user at $130, you will

The investor/value view:

Looking for fundamentals to justify the price paid and To justify a $19 billion
value for a company in equity markets today,
you would need that company to generate about $1.5 billion in after-tax
income in steady state.
Value of equity = $19 billion
Implied required return on equity, = 8.00%

(assumption 1)

Steady state earnings necessary to justify value = $ 19 billion *.08 =

$1.52 billion
Steady state pre-tax earnings needed to justify value, using an effective tax
rate of 30%
= $1.52 billion/(1-.30) = $2.17 billion
That would translate into pre-tax income of about $2.2 billion and it is a
lowball estimate of break even earnings, since the break even number will

There are three pathways to delivering

these break-even earnings:
If the company continues its current business model of allowing people to
try the app for free in the first year and charge them a dollar a year after
that (99 cents) and has zero operating costs (completely unrealistic, I
know), you would need about 2.5 billion people using the app on a
continuing basis.
It is possible that the app is so good that you could charge more per year
and not lose customer. At their existing user base of 450 million, that
would translate into about $5/year

per user, if you have no costs, and

more, if you have costs (which you clearly will).

The value may be in the form of advertising revenues from Whatsapps

Dangers in the deal

First, it is possible (and perhaps even probable) that the market is over
estimating the value of users at social media companies across the board.

Second, as social media companies move up the life cycle, the variable(s)
that even traders user to price companies will change from number of
users/user intensity to revenues, earnings and cash flow .

The Road Ahead

While Facebooks acquisition of WhatsApp received many positive
reviews from industry experts, but
Some were still unsure whether the deal would prove to be smart
move or not.
Analysts were anxious about the price and the fact that the
purchase was being made mainly in shares, thereby diluting the
power of other shareholders.
Analysts were of the view that in order to validate the valuation of

Challenges
Analysts were mostly positive about Facebooks acquisition of
WhatsApp, but
Some of them were worried about the valuation of the deal,
Which was Facebooks largest acquisition ever.
It was also one of the biggest deals in the tech industry and larger
than any deal done by Microsoft , Google, or Apple.
While Apple had never done a deal of over US$ 1 billion,
Microsofts biggest deal was acquiring Skype at US$ 8.5 billion,
And Googles biggest deal was acquiring Motorola Mobilty at US$

Conclusion

Whatsapp vision : let's make whatsapp available to everyone in the

world

Facebook mission : make the world more open and connected

Whatsapp will help Facebook do this by continuing to develop a service that

people around the word love to use every day