Facebook has entered into an agreement to acquire WhatsApp, the popular messaging app, for $16 billion in cash and stock, according to a filing Wednesday.
According to the filing, Facebook has agreed to pay $12 billion in stock and $4 billion in cash for the company. Facebook has also agreed to pay an additional $3 billion in restricted stock units to WhatsApp's founders and employees as part of the deal, which would bring the total deal price to about $19 billion.
WhatsApp, founded in 2009 by former Yahoo engineers Jan Koum and Brian Acton, is the most popular of a set of mobile messaging apps that some argued posed a threat to Facebook's business. The app served as an alternative to SMS by letting users send messages for free across smartphone platforms. It currently has more than 450 million people who use the app every day.
Mark Zuckerberg, Facebook's cofounder and CEO, said in a statement.
"WhatsApp is on a path to connect 1 billion people. The services that reach that milestone are all incredibly valuable. I've known Jan for a long time and I'm excited to partner with him and his team to make the world more open and connected."
On an investor call that followed the announcement, Zuckerberg added:
"The growth rate they have today and the monetization that's early but promising and in place, we see a clear trajectory ahead and are excited to work together on this."
Unlike Facebook, WhatsApp does not make money through ads. Instead, WhatsApp is free to use for the first year and then charges $0.99 a year for a subscription after that. The founders have been firm on not wanting to introduce advertising, a point that was re-iterated by Zuckerberg and Koum on the call.
"We think that for our product, advertising is not necessarily the right way to go. We think we have a very solid monetization system in place."
If the deal doesn't go through, Facebook will pay a breakup fee of $1 billion to WhatsApp, which is still more than the total amount Facebook ended up paying to acquire Instagram.
Facebook stock declined by more than 4.5% in after hours trading following the announcement.
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Facebook has long been rumored to be looking to make a big acquisition in the messaging space, including a report that it offered to buy Snapchat for as much as $3 billion. With 450 million monthly users, WhatsApp is likely significantly larger than Snapchat, not to mention larger than social networks like Twitter or LinkedIn.
Arvind Bhatia, an analyst with Sterne Agee. But he argues the deal makes more sense in the long-term says.
"If you look at it from the standpoint of [WhatsApp's] user base today and the fact that it doesn't really monetize, then it looks very expensive. It's truly one of those where [Facebook] is trying to ensure that where the user base is headed, it stays within the Facebook family."
While the price tag is high, Bhatia argues that Facebook was "smart" to pay for the vast majority of the acquisition in stocks, at a time when Facebook stock is trading at an all-time high.
Koum, the cofounder and CEO, had repeatedly denied that the company was looking to be acquired. Then again, it's not everyday you get offered $16 billion.
The New York Times reports that Zuckerberg and Koum had been in talks on-and-off for two years. On February 9 of this year, Zuckerberg invited Koum to dinner at his home in Palo Alto, where he proposed to buy WhatsApp. Koum later returned to Zuckerberg's home on Valentine's Day to talk through the details of the deal. The WhatsApp founder also reportedly ate "a plate of chocolate covered strawberries intended for" Zuckerberg's wife, Priscilla.
Zuckerberg and Koum nailed down the deal last weekend. As part of the acquisition, Koum will join Facebook's board of directors.
WhatsApp will continue to operate independently, which Zuckerberg compared to the way it handled the acquisition of Instagram.
The deal has been approved by the boards of both companies and is subject to regulatory approval. Facebook expects the deal to close later this year.
COMMENTARY: Determined to hang onto younger users, Facebook was forced to pay Whatsapp a staggering $19 billion. Google reportedly offered to buy WhatsApp for $10 billion -- a little more than half of what Facebook ultimately agreed to pay for the mobile messaging app. Plus, “the bid did not come with promise of a board seat, unlike the Facebook agreement,” Fortune reports, citing sources. Prior to Facebook’s announcement on Wednesday, it was widely rumors that a number of tech giants were drooling over WhatsApp, its working business model, and its rapid adoption among younger consumers.
Facebook founder Mark Zuckerberg wrote in a note posted to his Facebook page on Wednesday.
“I’m excited to announce that we’ve agreed to acquire WhatsApp and that their entire team will be joining us. WhatsApp will complement our existing chat and messaging services [including Facebook Messenger] to provide new tools for our community.”
Private messaging’s popularity does not cease as WhatsApp reported an increase of over 200 million users since April 2013, now standing at 430 million active users as of January 2014 (see above chart). A staggering 50 billion messages are sent and received on the Whatsapp app per day.
Courtesy of an article dated February 19, 2014 appearing in Mashable, an article dated February 20, 2014 appearing in MediaPost Publications MediaPost News and an article dated February 20, 2014 appearing in MediaPost Publications Social Media & Marketing Daily