Acquisition of WhatsApp by Facebook: A Calculated Risk?

Acquisition of WhatsApp by Facebook: A Calculated Risk?
Case Code: BSTR459
Case Length: 19 Pages
Period: 2013-2014
Pub Date: 2014
Teaching Note: Not Available
Price: Rs.400
Organization: Facebook, Whatsapp
Industry: Information Technology, Social Networking
Countries: US; Global
Themes: Mergers & Acquisitions, Growth Strategy
Acquisition of WhatsApp by Facebook: A Calculated Risk?
Abstract Case Intro 1 Case Intro 2 Excerpts


About WhatsApp

WhatsApp was founded by Jan Koum (Koum) and Brian Acton (Acton), both former employees of Yahoo Inc! (Yahoo). Koum was born in a small village near Kiev in Ukraine, Russia. His early life was one of hardship as his family struggled to make ends meet. In 1992, at the age of 16, Koum along with his family moved to the US. By 18, he learnt computer networking all by himself with the help of manuals bought from a used book store. At the age of 18, he enrolled at San Jose State University to study math and computer science and simultaneously worked at Ernst & Young as a security tester. While working at Ernst & Young, Koum met Acton. In 1998, Koum got a job at Yahoo as an infrastructure engineer. Soon he dropped out of college...

Acquiring WhatsApp

On February 19, 2014, Facebook announced that it was acquiring WhatsApp in a US$ 19 billion deal. The social networking giant would pay US$4 billion in cash and US$12 billion worth of shares for WhatsApp. WhatsApp’s founders and 55 employees would receive an additional US$3 billion in restricted stock units of Facebook over four years after the deal closed. Informal discussions between the two companies had reportedly been going on since 2012, when Zuckerberg first approached Koum. However, the deal started shaping up only in early February 2014. Facebook was advised by Allen & Co 18 on the deal, while WhatsApp was advised by Morgan Stanley...


While analysts were mostly positive about Facebook’s acquisition of WhatsApp, some of them were worried about the valuation of the deal, which was Facebook's largest acquisition ever. The deal was not only one of the biggest since Time Warner’s 22 US$ 124 billion merger with AOL 23 in 2001, 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 25 at US$ 12.5 billion....

The Road Ahead

While Facebook’s acquisition of WhatsApp received many positive reviews from industry experts, some were still unsure whether the deal would prove to be smart move or not. Investors, especially, 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 2018....


Exhibit I:Financial Highlights of Facebook
Exhibit II:Facebook Users Worldwide (2011-2017)
Exhibit III: Some Competitors of Facebook
Exhibit IV: WhatsApp Vs Its Main Competitors
Exhibit V: WhatsApp's Competitors
Exhibit VI: Growth in User Base of Social Services in First Four Years of Operation
Exhibit VII: Number of WhatsApp Users in Selected Global Regions (As of 4th Quarter 2013)
Exhibit VIII: Some of the Mega Deals in Tech Industry

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