Why Facebook (Nasdaq: FB) Really Bought WhatsApp

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Many tech companies are sitting on a ton of cash these days, but not Facebook Inc. (Nasdaq: FB). Its $19 billion acquisition of WhatsApp proves FB wants to put its cash to work.

Apple Inc. (Nasdaq: AAPL) has $141 billion in net cash on hand. Google Inc. (Nasdaq: GOOG) has a little more than $58 billion. There are hundreds of billions of dollars sitting offshore among tech and media companies. Investors have called for firms to buy back stock, hike dividends, or consider using that cash to grow through acquisitions.

Nasdaq: FBBut buy-side activity in the tech sector has been relatively tame in recent months.

Before buying WhatsApp, Facebook attempted to purchase SnapChat at the end of 2013 for $3 billion in cash. After they were turned down, the company began diligence on other potential acquisitions.

With the $19 billion acquisition of social-messaging application WhatsApp, the company made a bold move outbidding Google's $10 billion offer.

But Facebook did more than just pull the rug out from under its rival's growth strategy.

It cemented itself as the global leader in mobile media by using a very unique acquisition strategy.

Here's why:

For Facebook (Nasdaq: FB) Time Equals Money

Forget what you're reading in the headlines.

Sure, Facebook paid a meager $42 per WhatsApp user. This is in stark contrast to the average user-to-market cap cost of Twitter ($150), Facebook ($140), and LinkedIn ($120). But this number doesn't matter. It's little more than a PR talking point for people who know little about the real metrics of the marketing and media world.

Average-user cost doesn't tell us anything about long-term profitability. A free phone application with 450 million users that bumps to $0.99 per year isn't the sign that Facebook paid good money for "guaranteed consumers."

We need to dig deeper.

There are two reasons this acquisition works.

Join the conversation. Click here to jump to comments…

  1. Aron | February 21, 2014

    Cool, so at $42 dollars per customer and $1 of revenue per customer per year the acquisition will pay for itself in a scant 42 years.

    No worries. I'm sure WhatsApp will still be the hot new thing in 42 years time.

  2. H. Craig Bradley | February 22, 2014

    FACEBOOK A PRODUCT OF OUR TIMES

    "Facebook building together a media metric that few people understand". That's an understatement. More like globing together a bunch of smaller mobile companies into something yet to be determined. Keith Fitz-Gerald still strongly believes Facebook is a very risky stock which ultimately could cost (late) investors a lot of money if they hang around too long .

    He understands that this company is all about bamboozling the public and because for now, we think recreational chating is essential and indispensable. Maybe so when labor force participation is only 63%, the lowest since 1978. Lots of time and nothing to do except gossip. ( Mobile Salon anyone?) Keith thinks otherwise and won't buy it. ( Remember, Keith is a trader !!). Famed Magellan Fund manager Peter Lynch once said: " If you don't understand it, don't buy it". Good advice for any company actually.

    • Marc | February 23, 2014

      Hi to all,
      In 2010 I found out, after 31 years of working my butt off, that my ex business mgr. stole
      95% of my wealth. I trusted a thief, and the violation I felt still reverberates, thru my body.
      He even paid off my attorney so he did not have to go to jail or pay me a substantial amount.
      So with 100K left to my name and I need to leave LA to rent a cheap enough place, i.e. Portland,
      to survive on my SS, which is the most any one could obtain. What would you suggest to invest in as I need income in the neighborhood of 750 dollars a month. Please be respectful and try to be honest with your advice.
      Thank you, Marc

  3. bate vanko | February 24, 2014

    That is a sound investment! I mean, come on! Intel Corp's valuation is about 24 bn, Honda Motors is about 60 bn, I mean why not, Whatsapp is the same thing, right? What could go wrong there?

  4. Jemal Le Grand | March 12, 2014

    Facebook is making a long run move as stated above. combining Facebook that has over 1.3 Billion active users per day which will help expose Whatsapp and expand the daily usage of whatsapp around the world. At this moment it has 450 million users. now by exposing it it can surely grow to nearly 1 billion with time. Instead of being $42 per person it will surely grow to $80-100 per person.

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