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Facebook to pay $16 billion for texting app

by DAVID GELLES and VINDU GOEL, New York Times News Service on February 20, 2014 10:35 AM

The frenzy to acquire fast-growing technology startups reached new heights Wednesday as Facebook announced its largest acquisition ever, saying it would pay at least $16 billion for WhatsApp, a text-messaging application with 450 million users around the world who pay little or no money for it.

The eye-popping price signals the lengths to which Facebook’s co-founder and chief executive, Mark Zuckerberg, will go to protect his company’s turf as the dominant social network on the Web.

Facebook, in Menlo Park, Calif., will pay $4 billion in cash and $12 billion worth of shares for WhatsApp. But the ultimate cost of the deal could rise to $19 billion, with WhatsApp employees and founders receiving an additional $3 billion in restricted stock units, which would vest over the next four years.

By any measure, Facebook is paying a steep price for a service that does not sell advertising and has very little revenue. It charges users a flat fee of $1 a year to use the service, and the first year is free.

The purchase price dwarfs the $1 billion Facebook paid for Instagram, the photo-sharing service, in 2012. And the price is also much higher than the $3 billion Facebook unsuccessfully offered to acquire Snapchat, another messaging service, late last year.

But Zuckerberg is clearly willing to spend big to acquire hot messaging technologies.

“Facebook is constantly working to not lose anybody,” said Nate Elliott, an analyst with Forrester Research. “Sometimes that is them innovating on their own, sometimes that’s them mimicking competitors, and sometimes that’s them buying competitors.”

The acquisition also reflects a new strategy at Facebook: The company intends to acquire or build a family of applications instead of simply buttressing its core social network.

Facebook has struggled to gain traction in the message space, a big motivation for its failed offer for Snapchat. On a conference call with analysts, Jan Koum, WhatsApp’s co-founder and chief executive, played down the idea of putting ads on WhatsApp and said he was satisfied with its current subscription model, despite the paltry fees.

“Monetization is not going to be a priority for us,” Koum said.

By some metrics, the cash and stock being paid for WhatsApp make it among the richest deals of all time. With 55 employees, WhatsApp is commanding a price equivalent to $344 million an employee, or about $28 a user.

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