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24 Feb

Facebook acquired WhatsApp: 4 points that maybe help you understand that

Dear Friends,

In 19th of February, Facebook announced that has bought WhatsApp mobile application for 19 billion dollars. Wow!

I was impressed with that deal, so I would like to share some thoughts with you about it. What is mostly interesting in this story is not the deal as such BUT the controversy that arise globally whether this deal is actually valuable or is it the second .com bubble that is just around the corner.

Well, first of all allow me to share some facts:

  • WhatsApp acquisition is the largest acquisition ever, for Venture baked company.
  • On late 2013, it was revealed that Facebook has tried to acquire SnapChat for 3 billion dollars. His Founder Evan Spiegel has rejected the offer. Everyone took him for crazy but there were some voices there to say that he was smarter than crazier than many of us have been thinking.
  • Four Numbers for WhatsApp 450 – 32 – 1 – 0
    450 = millions of monthly active users
    32 = Engineers
    1 = The service costs 1 euro per year.
    0 = budget spended in marketing
  • Last and final Valuation round for WhatsApp was around 1.5 billion dollars.
  • Facebook acquired WhatsApp for HARD CASH. This means that 19 billion was not a just a valuation in papers. This is 4.75 billion dollars (25%) out of the Facebook’s cashflow, and the rest is stock exchange (which is also real money…)
  • Most chances are that Mark Zuckerberg is more clever and wise from me (and most of people that I know :p )

I will not tell you whether WhatsApp is worth of 19 billion dollars, or if this is the next .com bubble. I will just share 4 points with you that maybe help you understand this deal.

1 What is the cost of the Rope?

Imagine yourself at a local store looking for 2 or 3 metres of rope. You can easily identify various kinds of ropes at many different prices. Lets say than the most expensive one would cost around 30 dollars.

Now imagine yourself hanging at the edge of a rock which could cause immediate death!

What is the cost of the rope now?

2 Riding a Bicycle

Doing Business, is like riding a bicycle. You only have two choices:

– You keep pushing on the pedals to move forward,

– OR you stop pushing. And you fall from the bike.

No other choice. (Especially at such a dynamic and uncertain industry like that!)

3 The Monopoly game

I am sure that most of you have played monopoly. Many of you might be really enthusiasts and fans of this game (like me!). Playing Monopoly game is not like growing sustainable Business or deploying successful revenue models. It’s all about BRUTAL COMPETITION. Your only goal is to defeat the other players (your competitors). If there is a property in the game and only 2 or 3 players, lets say, bidding for it, real valuations do not matter there. Only thing that matters is the defeat of the other players.

The Game rules are a bit different there than what most of us know: Cash is endless, BUT properties are limited!

4 Disruption

At the high tech industry, such as internet and mobile, there are some big players like Facebook, Google, Apple, Amazon, Microsoft etc. Those companies cannot be threatened by other smaller companies in terms of cash flow, know how, innovation or any other kind of resource-dependency.

The real Threat for those companies is the Disruption. New startups that have the potential to disrupt a market in a completely new approach and change the rules of the game. Acquisitions of those disruptive startups are one of the most successful ways to outcome this threat. As simple as that!

This Threat is there and is real. The given point is that Facebook has to act proactively and keep doing business in a competitive way to sustain its position in the market. (Same stands for any other Business in such competitive market) It has to act decisively really fast so that it can sustain its Growth and the growth of its market in general.

 

I do not know whether WhatsApp is worth that money (probably not), or if this is the next .com bubble. I really like the controversial part of this story. However as I was thinking that deal, those four points (which is just a scenario) really helped me justify why this acquisition happened :)

Michael Oikonomou

 

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