The $16 billion deal, which jumps to $19 billion if it closes, came as a surprise not only because of the eye-popping purchase price but also because Facebook had made it clear in the past that it wasn’t looking to buy other services. Chief executive Mark Zuckerberg said as much when Facebook paid $1 billion for the photo-sharing service Instagram in 2012.
"We don't plan on doing many more of these, if any at all," Zuckerberg wrote at the time.
But it’s clear from the WhatsApp acquisition that Facebook is willing to sink the money into these big purchases if it believes it can’t produce its own market-leading app in an area that it wants to control. And that’s a result of the intense pressure the company is under to keep up growth among younger users and retain high levels of engagement with its site, said Pacific Crest Securities analysts Evan Wilson and Brian Liang in a note to investors Thursday.
“Facebook tried and largely failed, in our view, to develop Facebook Messenger into a product that would stem the growth of the mobile messaging services as a whole,” the note said. “It also tried and failed, in our view, to create products that would stunt the momentum of Instagram and Snapchat, which confirms our previous expectation of increasing investment from Facebook in 2014.”
Buying WhatsApp gives the company a short-term advantage in the messaging space, but it will still have to fight off increasing competition for a fickle social media audience that hops often from service to service.
Analysts have raised questions about the value of the deal, given that WhatsApp is such a young company and hasn’t developed a clear business model. The app has some subscriptions, but its co-founder Jan Koum has a vehement aversion to advertising.
The purchase price has undoubtedly been heavily influenced by Facebook’s defensive mindset and a desire to ensure that WhatsApp didn’t fall into the hands of a competitor, said Martin Garner, senior vice president of CCS Insight. Garner said that Facebook will have little time to prove that the acquisition was worth a purchase price of over 10 percent of Facebook’s market capitalization.
Wilson and Liang said the valuation of WhatsApp is difficult to justify in the long run, which, by extension, makes them uneasy about Facebook’s own valuation.
“We are somewhat skeptical that the company can maintain its relevance and valuation over the long term based on its current product set” as competition ramps up, the Pacific Crest analysts said. “Doing these acquisitions is the third-best option, in our view. We would rather see Facebook be successful organically or acquire these competitors earlier (and cheaper).”