FACEBOOK PAID $19 BILLION FOR WHATSAPP EVEN THOUGH WHATSAPP HAD ALMOST NO REVENUE
In 2014, Facebook agreed to buy WhatsApp for a number that looked almost absurd compared with the company's revenue.
WhatsApp had generated only:
$10.2 million in revenue in 2013.
Facebook agreed to pay approximately:
$19 billion.
That meant Facebook was paying an amount roughly 1,860 times WhatsApp's 2013 revenue.
And yet Mark Zuckerberg wasn't primarily buying revenue.
He was buying something much harder to build:
a massive global messaging network.
WHATSAPP WAS ALMOST THE OPPOSITE OF FACEBOOK
WhatsApp had a remarkably simple product.
No complicated news feed.
No giant advertising system.
No huge collection of games.
Just messaging.
Users could send:
Text messages
Photos
Videos
Voice messages
Group messages
And the service worked across different mobile platforms.
By February 2014, WhatsApp had more than 450 million monthly active users, with roughly 70% active on a given day. It was adding more than 1 million registered users per day.
The business was tiny compared with the size of its audience.
That was precisely what made the acquisition so unusual.
THE REVENUE WAS ALMOST NOTHING
WhatsApp's financial statements later disclosed just how small its business was.
2012
Revenue:
$3.8 million
2013
Revenue:
$10.2 million
First half of 2014
Revenue:
$15.3 million
At the same time, WhatsApp was still losing money.
Its 2013 net loss was approximately $138 million, although much of that loss came from share-based compensation rather than ordinary cash operating expenses.
So Facebook wasn't buying a profitable business.
It wasn't even buying a particularly large revenue-generating business.
It was buying users.
AND WHATSAPP HAD A STRANGE BUSINESS MODEL
WhatsApp deliberately avoided traditional advertising.
Instead, the company had experimented with charging users a small annual subscription fee.
The philosophy was very different from Facebook's.
Facebook had built a gigantic advertising machine.
WhatsApp was essentially saying:
Keep the product simple.
Keep it fast.
Don't fill it with advertising.
That made the two companies look almost completely different.
THEN FACEBOOK OFFERED $19 BILLION
On February 19, 2014, Facebook announced the acquisition.
The headline transaction value was approximately:
$16 billion
consisting of:
$4 billion in cash
$12 billion in Facebook shares
Then there was another:
$3 billion
in restricted stock units for WhatsApp founders and employees.
That brought the announced headline value to roughly:
$19 billion.
This was an enormous number.
Especially for a company that had generated only $10.2 million in revenue the previous year.
BUT FACEBOOK WASN'T REALLY PAYING FOR $10 MILLION OF REVENUE
Think about what Facebook was actually getting.
WhatsApp already had:
450M+ monthly users
↓
Highly frequent messaging
↓
Rapid user growth
↓
Global reach
↓
A strong mobile position
↓
A product used every day
Facebook could theoretically build another messaging product.
But building the network from zero would be much harder.
Imagine launching a messaging app and telling people:
"Download this. Your friends aren't here yet."
That's the problem with social networks.
The product becomes more useful when other people are already using it.
THE REAL ASSET WAS THE NETWORK
Suppose you build a messaging app.
You have:
1 million users.
Another company has:
450 million users.
Even if your app has better technology, the other company's users already have their friends, family and contacts inside the network.
Moving them is difficult.
That's why Facebook's acquisition wasn't simply about buying software.
It was buying a network effect.
FACEBOOK ALREADY UNDERSTOOD THIS
Facebook had already demonstrated that acquiring social products could accelerate its position in mobile.
Before WhatsApp, Facebook had purchased Instagram for approximately $1 billion in 2012.
WhatsApp was an entirely different scale.
Facebook itself said the WhatsApp acquisition would strengthen its position in the broader mobile ecosystem and allow WhatsApp to continue operating independently with its own brand.
WHATSAPP HAD ONLY ABOUT 50 PEOPLE
Here's another number that makes the deal look even stranger.
WhatsApp had only around 50–55 employees when Facebook agreed to buy it.
That meant Facebook was effectively acquiring a company with hundreds of millions of users and an enormous global footprint while employing a tiny team.
The contrast was extraordinary:
450+ million users
and roughly
50 employees.
THE COMPANY WAS GROWING FASTER THAN ITS REVENUE
This was the key.
WhatsApp's user base was exploding.
Its monetization wasn't.
That created a huge gap between:
the value of the network
and
the money the network was currently generating.
Facebook was betting that the first could eventually become much more valuable than the second.
FACEBOOK EVEN EXPLAINED THE BET
After the acquisition, Facebook told the SEC that WhatsApp's large and rapidly growing user base could create significant long-term monetization potential.
The company also said it was focused initially on growing the user base rather than aggressively monetizing it.
That's an important distinction.
Facebook wasn't saying:
"WhatsApp already makes billions."
It was effectively saying:
"Look at how many people use it — and how quickly that number is growing."
THE ACCOUNTING REVEALED SOMETHING INTERESTING
When Facebook later disclosed its acquisition accounting, it allocated approximately:
$2.026 billion to the WhatsApp user base
$448 million to the brand
$288 million to technology
and approximately
$15.3 billion to goodwill.
The goodwill represented things such as future growth, potential monetization and strategic advantages that couldn't simply be assigned to identifiable assets.
That tells you something about the deal.
Facebook wasn't buying a pile of physical assets.
It was buying future economic potential.
THEN THE USER COUNT KEPT CLIMBING
Facebook had announced the acquisition with roughly:
450 million monthly active users.
By April 2015, WhatsApp had reached approximately:
800 million monthly active users.
Facebook told the SEC that this growth strengthened its view that WhatsApp had significant long-term monetization potential.
The original thesis was becoming easier to understand.
Facebook had paid a huge price for a network that was still expanding extremely quickly.
THE DEAL ALSO LOOKED EXPENSIVE BECAUSE FACEBOOK WAS SO MUCH BIGGER
At the time, Facebook was already a massive public company.
So the acquisition wasn't some tiny bet for Zuckerberg.
The announced $19 billion value was enormous.
And investors immediately reacted.
Facebook's share price fell after the announcement, reflecting concerns about the price being paid for WhatsApp.
The market wasn't automatically convinced.
THEN FACEBOOK CHANGED WHAT "REVENUE" MEANT
The interesting thing about a company like WhatsApp is that there are several ways to create economic value from a huge user network.
For example:
Subscription fees
↓
Business messaging
↓
Payments
↓
Commercial communication
↓
Other services
The exact strategy can change over time.
The important asset is the audience.
THE BIGGEST RISK WASN'T WHATSAPP'S REVENUE
It was whether WhatsApp could remain:
useful
popular
and
widely adopted
without destroying the experience that made people love it.
If Facebook pushed aggressive monetization too quickly, users could leave.
If Facebook never monetized the service, the acquisition would have to be justified primarily through strategic value.
That was the tension inside the deal.
THIS IS WHY USERS CAN BE MORE VALUABLE THAN REVENUE
Imagine two companies.
COMPANY A
Revenue:
$500 million
Users:
5 million
COMPANY B
Revenue:
$10 million
Users:
500 million
You can't automatically say Company B is worth more.
But you also can't assume Company A is worth more simply because it generates more revenue.
Company B might have:
network effects
rapid growth
high engagement
strategic value
future monetization opportunities
Those things can influence what an acquirer is willing to pay.
FACEBOOK WAS BUYING TIME
There was another strategic reason.
Facebook knew that people's communication habits were moving increasingly toward mobile messaging.
The question wasn't only:
"How much money does WhatsApp make?"
It was:
"What happens if hundreds of millions of people communicate through WhatsApp every day?"
Owning that network could prevent a competitor from controlling such an important part of mobile communication.
That's strategic value.
THE $19 BILLION NUMBER WASN'T REALLY ABOUT TODAY
This is the most important lesson.
Facebook wasn't paying $19 billion for:
$10.2 million of annual revenue.
It was paying for the possibility that:
450 million users
could eventually become
800 million
then
1 billion+
and that the network could become strategically important enough to justify the price.
The investment thesis was based heavily on future value.
AND THAT'S WHY THE DEAL LOOKED CRAZY
At the moment of acquisition, the numbers looked bizarre.
$19 billion
for a company making roughly
$10 million
in annual revenue.
But technology acquisitions aren't always priced according to current revenue.
Sometimes the buyer is paying for:
users
growth
technology
brand
network effects
market position
and
future monetization.
WhatsApp had very little revenue.
But it had something Facebook believed was much harder to reproduce:
hundreds of millions of people already using the product.
MAACAT PERSPECTIVE
Facebook didn't buy WhatsApp because its income statement looked impressive.
It bought WhatsApp because its user graph did.
The company had almost no revenue compared with the size of the acquisition.
But it had hundreds of millions of people communicating every day, rapid growth, a tiny team and a position in mobile messaging that would have been extremely difficult to recreate from scratch.
That's the strange economics of technology companies:
Sometimes the most valuable number on the income statement isn't there yet.
The buyer is paying for the possibility that the users, network and scale will eventually become the business.
