What’s that App

Facebook (FB)+WhatsApp for $19B.  This is the mega deal of the year- so far! And one that makes a whole lot of sense to a few people and no sense whatsoever to the majority. Except for one thing. The few that know have obviously figured out something to justify that monster valuation. I mean look- there is no parallel. I was trying to find out a comparable transaction in this space in recent times and just could not.

 

The only asset on the books worth mention on the WhatsApp side is 450Mn active users. And perhaps a global network for chat messages and some technology patents of having all that work together really well on ios and android. Now beyond that there is a meaningful part about the rate of growth of those users- double digits for sure but again how high. So let’s see how that high X multiple could have come about

 

–       High double digit growth rate of users

–       High intensity of usage per day – say approaching 2 hrs per day?

–       Global spread of user base- let’s assume they are across every continent inhabitable and growing in each continent/country at double digit rates

–       No forseeable obstacles in growth rates- either through country level infrastructure issues or censorship issues

–       An internal plan to monetize those users- directly- charge $2 a yr which implies that at current user levels only, FB can get revenues of $1B per year?!

–       Or monetization through advertising? – nothing new but that’s the current FB model anyways.

–       Integration into Facebook chat – could draw new users into FB? ie FB discovered what new users are doing today- ie more WhatsApp and less FB per day.

–       Google and Apple falling over each other to outbid FB

 

Whatever the reason or reasons there will be so many skeptics and what could happen in the coming days –

–       FB board gets cold feet after discovering something new

–       Disgruntled FB shareholder taking legal means to force board to reconsider

–       Way too much press attracts new suitors to WhatsApp

–       FB stock tanks and both sides decide against doing this now- surely there must be a range within which there is tolerance for the stock drop to make this deal happen since much of the deal is in terms of FB stock

 

For now, it will be a positive for Silicon Valley valuations- like a tide moves several boats, this deal can lift even the lowest of valuations by some X. It may even herald the true arrival of the App industry. Longer term it will be Zuckerberg’s challenge to show that he sees much more ahead with this combination than everyone. With FB’s track record thus far, he probably could pull this one off.