Facebook Buying WhatsApp for $19B

Facebook is buying mobile messaging service WhatsApp for $19 billion in cash and stock, by far the company's largest acquisition and bigger than any that Google, Microsoft or Apple have ever done.

The world's biggest social networking company said Wednesday that it is paying $12 billion in Facebook stock and $4 billion in cash for WhatsApp. In addition, the app's founders and employees — 55 in all — will be granted restricted stock worth $3 billion that will vest over four years after the deal closes.

The deal translates to roughly 11 percent of Facebook's market value. In comparison, Google's biggest deal was its $12.5 billion purchase of Motorola Mobility, while Microsoft's largest was Skype at $8.5 billion. Apple, meanwhile, has never done a deal above $1 billion.

The deal's price tag stunned Gartner analyst Brian Blau. "I am not surprised they went after WhatsApp, but the amount is staggering," he said.

Facebook likely prizes WhatsApp for its audience of teenagers and young adults who are increasingly using the service to engage in online conversations outside of Facebook, which has evolved into a more mainstream hangout inhabited by their parents, grandparents and even their bosses at work.

Facebook's new acquisition also has a broad global audience. Facebook CEO Mark Zuckerberg said the service "doesn't get as much attention in the U.S. as it deserves because its community started off growing in Europe, India and Latin America. But WhatsApp is a very important and valuable worldwide communication network. In fact, WhatsApp is the only widely used app we've ever seen that has more engagement and a higher percent of people using it daily than Facebook itself."

WhatsApp, a messaging service for smartphones, lets users chat with their phone contacts, both one-on-one and in groups. The service allows people to send texts, photos, videos and voice recordings over the Internet. It also lets users communicate with people overseas without incurring charges for pricey international texts and phone calls. It's free to use for the first year and costs $1 per year after that. It has no ads.

Blau said Facebook's purchase is a bet on the future. "They know they have to expand their business lines. WhatsApp is in the business of collecting people's conversations, so Facebook is going to get some great data," he noted.

In that regard, the acquisition makes sense for 10-year-old Facebook as it looks to attract its next billion users while keeping its existing 1.23 billion members, including teenagers, interested. The company is developing a "multi-app" strategy, creating its own applications that exist outside of Facebook and acquiring others. It released a news reader app called Paper earlier this month, and has its own messaging app called Facebook Messenger.

"Facebook seems to be in acknowledgement that people are using a lot of different apps to communicate," said eMarketer analyst Debra Aho Williamson. "In order to continue to reach audiences, younger in particular, it needs to have a broader strategy...not put all its eggs in one basket."

Facebook said it is keeping WhatsApp as a separate service, just as it did with Instagram, which it bought for about $715.3 million nearly two years ago.

WhatsApp has more than 450 million monthly active users. In comparison, Twitter had 241 million users at the end of 2013. At $19 billion, Facebook is paying $42 per WhatsApp user in the deal.

The transaction is likely to raise worries that Facebook and other technology companies are becoming overzealous in their pursuit of promising products and services, said Anthony Michael Sabino, a St. John's University business professor.

"This could be seen as a microcosm of a bubble," Sabino said. "I expect there to be a lot of skepticism about this deal. People are going to look at this and say, 'Uh, oh, did they pay way too much for this?"

For Facebook, WhatsApp's huge user base, fast growth pace and popularity is worth the money. The app is currently adding a million new users a day. At this rate, said Zuckerberg, WhatsApp is on path to reach a billion users. He called services that reach this milestone "incredibly valuable." It's an elite group to be sure — one that includes Google (which owns YouTube), Facebook itself and little else.

"We want to provide the best tools to share with different sized groups and in different contexts and to develop more mobile experiences beyond just the main Facebook app, like Instagram and Messenger," Zuckerberg said in a conference call. "This is where we see a lot of new growth as well as a great opportunity to better serve our whole community."

Forrester analyst Nate Elliot said in an emailed note that "it'll be tempting to read this as a sign Facebook is scared of losing teens... And yes, the company does have to work hard to keep young users engaged. But the reality is Facebook always works hard to keep all its users engaged, no matter their age. Facebook is tireless in its efforts to keep users coming back."

Asked about the demographics of WhatsApp's users, Facebook finance chief David Ebersman said that, "if you look at the kind of penetration that WhatsApp has achieved, it sort of goes without saying that they have good penetration across all demographics, we would imagine.

That said, "it's not a service that asks you to tell them your age when you sign up," he added.

The deal is expected to close later this year.

Facebook's shares fell $1.82, or 2.7 percent, to $66.24 in after-hours trading Wednesday after the deal was announced. Earlier in the day, the stock hit a 52-week high of $69.08.