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Part III – Analysis of Facebook’s Acquisition of Whatsapp

March 5, 2014
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This blog is an extension of our blog on Part II - Analysis of Facebook's Acquisiton of Whatsapp

What’s the app (appropriate) valuation of WhatsApp?

This note will remain incomplete if we don’t suggest or at least make an attempt to suggest the appropriate valuation of WhatsApp at this stage. Given the business model of WhatsApp as of now, one should not be willing to value this beyond the range of $ 4.5 – 5.0 bn after incorporating the control premium and giving due weightage to the platform it has to offer and the expected synergistic benefits it can bring to Facebook.

Please refer to the model below:


I have kept the revenue assumptions at current level. Any improvement in the business model or the top line of the company from here will happen due to efforts of Facebook and hence it should not pay any price for the same upfront. Why pay price for the values that will be created due to your efforts to the sellers?


The mode of transaction also speaks a lot about the irrational valuation of this deal. Even though consideration is $ 19 bn, only $ 4 bn is by means of cash. The balance is through issuance of shares of Facebook which is already hyped and overvalued. It’s like swapping an inflated asset with another highly inflated asset. I can say with reasonable degree of certainty that had this been a pure cash deal, Facebook wouldn’t have gone ahead.


Facebook is currently fetching a valuation of $ 130 per user. If entire 450 mn users of WhatsApp migrate to Facebook and market start pricing these users also @ $ 130 / user; then Facebook will add close to $ 58 – 59 bn to its market cap against the consideration of $ 19 bn. Even if this happens in 3 years’ time, it means an internal return of 45% and above. But three years’ time frame is very long, market can turn irrational within moments.


Closing Note
The business environment of the technology, communication and social media companies are changing rapidly. One technology evolves and kills other. Look at the example of Kodak – a victim of evolving technology. They brought digital camera technology and ultimately became its own victim.
What happened to Blackberry is not unhidden from us. They were the one who brought emails and chat on mobile. Due to lack of R&D and innovation, they may die natural death sooner or later.
World is moving towards integration of laptop, desktop, mobile, camera and what not into one. The way we are communicating through our gadgets is undergoing a big change. The success of Facebook in future is far from certain. It appears not to be at the forefront of the revolution.Facebook appears not fully prepared to grasp the trend. It missed the mobile technology bus and realized this about 2 years back. But now it has in its portfolio Instagram and WhatsApp. It will be worth waiting and watching to see what future has in store for Facebook.


If you want to read about how Whatsapp generates revenue, go through our blog on How Does Whatsapp Generate Revenue?


About the Author

Shashi is a B.Tech from Indian Institute of Technology, Delhi and an MBA from Indian Institute of Management (IIM), Ahmedabad. With over 11 years of experience, he has dabbled in Project Management, Management Consulting, Investment Banking, Mergers & Acquisitions, Corporate Finance, Strategy Formulation and Fund Raising.


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