M&A of Facebook and Whatsapp

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Jan Koum CEO of WhatsApp Mark Zuckerberg CEO of Facebook Presented by: Ebenezer Benjamin Jatin Aggarwal Neha Jain

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Analysis of the key aspects and performing the valuation

Transcript of M&A of Facebook and Whatsapp

Page 1: M&A of Facebook and Whatsapp

Jan Koum CEO of WhatsApp

Mark ZuckerbergCEO of Facebook

Presented by: Ebenezer Benjamin Jatin Aggarwal Neha Jain Priya Upadhyay

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Facebook WhatsApp Deal


• User Base-1.23B

• M-cap-170.55B$

• Revenue-7.9B$

• Net Income-1.5B$

• Listed on Nasdaq

• CEO-Mark Zuckerberg


• User Base-0.45B

• M-cap - N/A

• Revenue-??

• Net Income-???

• CEO-Jan Koum & Brian Acton


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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.

Acquiring WhatsApp

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Purchase Consideration

FB shares(12 Billion US $)

Cash(4 Billion US $)

Restricted Stock(3 Billion US $)

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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

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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.

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WhatsApp extraordinary growth in users…

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Facebook Stock Movement.

Facebook came with IPO at 39$/Share.123 Billion User—0.76 Daily User’s in which 60-70% access FB through Mobile .FB introduced its App in 2012.FB Acquired Instagram for 1Bn$.

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• Competitors like Wechat, Skype, line

• Similar applications and free.

• Not diversified, because other applications offers the same service and function as social media

• Only works with a data plan or wifi.

• Advanced technology• Recognized application• Modernization of people• Increased demand of


• Loyal customers• Market share leadership• Available for all platform• No need to remember PINs

and usernames• No need of login/logout• Free voice calls




SWOT analysis (whatsApp)

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Relative Valuation Approach.

• Verizon’s deal to buy 45% stake in verizon’s wireless for 130 Billion.

Valuation is Huge ,But valuation is about FUTURE.

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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.

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Comparison Analysis

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• To reclaim the teen demographic, a key group of users who have grown

disinterested in Facebook

• Diversify with a broad based of mobile services.

• A decrease in daily users, specifically among younger teens." A report from

Piper Jaffray confirmed 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.

• Entry into emerging markets.

What's in it for Facebook? (Benefits enjoyed by Facebook)

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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 generate an increase in market value

of $20.8 billion, higher than the price paid.


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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


• 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 increase, the longer you have to wait

for steady state and the more risk there is in the business model

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• 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 Whatsapp’s users but that will be

tricky. On the home page for the app, here is what the app’s developers say about


There are three pathways to delivering these break-even earnings:

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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.

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• While Facebook’s 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 the deal,

WhatsApp would need to generate around US$1billion in annual cash flow by



The Road Ahead

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• Analysts were mostly positive about Facebook’s acquisition of WhatsApp, but

• Some of them were worried about the valuation of the deal,

• Which was Facebook’s 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, Microsoft’s biggest deal

was acquiring Skype at US$ 8.5 billion,

• And Google’s biggest deal was acquiring Motorola Mobilty at US$ 12.5 billion.


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• 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

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