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 The transaction involves $4 billion in cash, $12 billion in stock
and $3 billion in restricted stock that vests over several years.
The WhatsApp deal is worth more than Facebook raised in its own IPO
and underscores the social network's determination to win the market
for messaging.
Founded by a Ukrainian immigrant who dropped out of college, Jan
Koum, and a Stanford alumnus, Brian Acton, WhatsApp is a Silicon
Valley startup fairy tale, rocketing to 450 million users in five
years and adding another million daily.
"No one in the history of the world has ever done something like
this," Facebook Chief Executive Mark Zuckerberg said on a conference
call on Wednesday.
Zuckerberg, who famously closed a $1 billion deal to buy
photo-sharing service Instagram over a weekend in mid-2012, revealed
on Wednesday that he proposed the tie-up over dinner with CEO Koum
just 10 days earlier, on the night of February 9.
WhatsApp was the leader among a wave of smartphone-based messaging
apps that are now sweeping across North America, Asia and Europe.
Although WhatsApp has adhered strictly to its core functionality of
mimicking texting, other apps, such as Line in Japan or Tencent
Holdings Ltd's WeChat, offer games or even e-commerce on top of
their popular messaging features.
The deal provides Facebook entree to new users, including teens who
eschew the mainstream social networks but prefer WhatsApp and
rivals, which have exploded in size as private messaging takes off.
"People are calling them 'Facebook Nevers,'" said Jeremy Liew, a
partner at Lightspeed and an early investor in Snapchat.
How the service will pay for itself is not yet clear.
Zuckerberg and Koum on the conference call did not say how the
company would make money beyond a $1 annual fee, which is not
charged for the first year. "The right strategy is to continue to
focus on growth and product," Zuckerberg said.
Zuckerberg and Koum said that WhatsApp will continue to operate
independently, and promised to continue its policy of no
advertising.
"Communication is the one thing that you have to use daily, and it
has a strong network effect," said Jonathan Teo, an early investor
in Snapchat, another red-hot messaging company that flirted year ago
with a multibillion dollar acquisition offer from Facebook.
"Facebook is more about content and has not yet fully figured out
communication."
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PRICE TAG
Even so, many balked at the price tag.
Facebook is paying $42 per user with the deal, dwarfing its own $33
per user cost of acquiring Instagram. By comparison, Japanese
e-commerce giant Rakuten just bought messaging service Viber for $3
per user, in a $900 million deal.
Rick Summer, an analyst with Morningstar, warned that while
investors may welcome the addition of such a high-growth asset, it
may point to an inherent weakness in the social networking company
that has seen growth slow in recent quarters.
"This is a tacit admission that Facebook can't do things that other
networks are doing," he said, pointing to the fact that Facebook had
photo-sharing and messaging before it bought Instagram and WhatsApp.
"They can't replicate what other companies are doing so they go out
and buy them. That's not all together encouraging necessarily and I
think deals like these won't be the last one and that is something
for investors to consider."
Venture capitalist Sequoia Capital, which invested in WhatsApp in
February 2011 and led three rounds of financing altogether, holds a
stake worth roughly $3 billion of the $19 billion valuation,
according to people familiar with the matter.
"Goodness gracious, it's a good deal for WhatsApp," said Teo, the
early investor in Snapchat.
Facebook pledged a break-up fee of $1 billion in cash and $1 billion
in stock if the deal falls through.
Facebook was advised by Allen & Co, while WhatsApp has enlisted
Morgan Stanley for the deal.
Shares in Facebook slid 2.5 percent to $66.36 after hours, from a
close of $68.06 on the Nasdaq.
"No matter how you look at it this is an expensive deal and a very
big bet and very big bets either work out or they perform quite
poorly," Summer said. "Given the relative size, the enterprise
valuations this is a very significant deal and it may not be the
last one."
(Reporting by Garry Shih and Sarah
McBride in San Francisco; additional reporting by Soham Chatterjee
in Bangalore; writing by Edwin Chan; editing by Savio D'Souza,
Andrew Hay, Peter Henderson and Lisa Shumaker)
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