How Can Facebook Justify $19B for WhatsApp? Users

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Feb. 20 (Bloomberg) -- Facebook agreed to purchase mobile-messaging startup WhatsApp for as much as $19 billion in cash and stock, the biggest Internet acquisition in more than a decade. Bloomberg Contributing Editor Paul Kedrosky and Bloomberg's Cristina Alesci speak on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Reporter cristina alesci.

Paul, $19 billion.

It is a huge number.

How does facebook justify this?

Yeah, it is a big number.

I was just looking at the numbers last night, the largest venture capital based company in history which is remarkable, so the way to get at this kind of valuation is on a basis.

400 million users, maybe a billion by the end of the year, adding a million users a day.

So on a per user basis, which is the metric we use with the instagram acquisition, dating back to these network of acquisitions come about $40, which puts it on par with apps of -- with other acquisitions of this area.

You know, cristina, let's not forget that snapchat turned down 3 billion dollars from facebook.

To that have an effect, cristina alesci, on the valuation for what we are seeing on whatsapp?

It is unclear, but facebook needs to grow users, and how much they are going to pay for it, this is their number one priority.

It is very clear from its acquisition that whatever product that people are on, facebook once to buy it.

Any kind of gross product.

This speaks to the fact that you know, they are willing to take a risk here.

We don't know too much about what their internal financial situation is.

Are they making money?

It is tough to tell but what we do know is at least they have some revenue.

450 million users, some of those users are paying for the service, presumably.

Not all of them, however, remember, the first year of the services for free, so you cannot just assume that you multiply one dollar by 400 million users and you have the equivalent of the revenue because we do not know exactly to your point with the revenue is this year.

All, why did facebook need this?

They have a chat service.

I have chatted with you, cristina, on it.

Why did they have to get something separate?

Growth.

80% year-over-year compound is the kind of growth that turns you into a facebook very quickly.

If you look at how people are using the service, it is much more complex than a messaging service.

People are sharing something like 600 million photos, sending billions of text messages.

These are the kind of numbers that rapidly turns into a facebook-like service in very short order.

They are saying this thing could rack up the leak -- this thing could rapidly be us.

We cannot allow that to happen.

We are going to buy it and this largely paper acquisition, something like $13 billion of this is in facebook paper, and that is really important.

Walk us through that.

It is still like, what, $4 billion cash?

The cash portion is a smaller portion here.

We have $12 billion in a stock, and this could be an indication that facebook things that its own stock is fairly or even richly valued because you are limiting your downside here by using a lot of stock to do it.

So this is actually a statement on perhaps where facebook shares are valued right now.

They need to take advantage of that into a stock acquisition is a perfect way to take advantage of an expensive stock price.

Very good point.

Cristina, how did this deal come together?

We were all kind of stunned when it crossed.

We looked into -- $19 billion.

How does a $19 billion deal come together?

Trish, when i started reading some of the coverage, this was brilliantly spun in a way that zuckerberg and the founders of whatsapp are best friends, they take hikes together.

At the end of the day, the founder of whatsapp is going to be on the board of facebook.

It is somewhat unusual that a target company gets its feet on the by yours board.

-- on the buyer's board.

It is smaller than facebook is.

It is not like a merger of "equals," not that this ever happened.

People will have some say in how facebook does business.

And the founders of whatsapp were saying look, we will not do advertising on our platforms to matter what happens.

They are reassuring customers.

That is a really big point and it could be a real point of contention down the line further.

How is it going to make money?

You pay $.99 a year?

[laughter] i don't think so.

That would be lovely if that were the case because it suggests we do not have to worry about ads.

My guess is you will sue some version of the promoted tweets and promotions and other things, industry monetization as the kids like to call it, showing up rapidly.

-- instream monetization at the kids like to call it.

We're looking at a company that could be four times that size and potentially could generate very material revenue doing very twitter-like things within 12 months to 18 months.

You mentioned the kids -- that is an important thing to cover here because kids these days are always looking for the newest thing.

Snapchat has been very popular lately, whatsapp has been popular.

Though you run the risk if you are facebook of putting all this money and the kids at something else by next year that they are using?

Yeah, i mean, that is the really important point here.

The rapid growth in four years is stunning, so there is your value.

But if a company can grow this quickly and still have this fragile position with no real mode in the market, it also makes you wonder exactly where the value is here.

That is the essential tension and all of these rapidly growing networks.

What is their real motive get someone else doing the same thing?

The answer is there's not really one, but from facebook's standpoint, you cannot afford to take the option a® la the of buying this before someone else does.

It almost feels like the nightclub.

While the kids are flocking to that.

Six months.

Right, so what is coming next?

What does this mean for the tech industry as a whole?

Obviously blackberry, i think the shares ofrose on this news because they were rumors they wanted to sell their messaging app.

There are two camps out there.

There are the camps in silicon valley that think that this is crazy and my give some people some pause or at least time to reflect on evaluations out there, and there are some companies that are just going to take advantage, they will try to go couple -- go public, they will try to get sold based on evaluation of this company.

Why not?

I am usually the most skeptical -- it feels to me much more about this groundswell that is mobile, that there is an incredible, unprecedented transition going on from desktop to mobile at this rapid rate and everyone is filling in all the pieces as quickly as they can in the face of google and others out there who will be trying to do the same thing.

The next thing you know what, on a valuation basis, it is not that expensive.

That seems like an absurd and to say at these prices, but it really is not.

How can you say it is not that expensive?

When you look at some of the valuation metrics.

I am going to go back to looking at facebook, linkedin, and twitter themselves, look at them on a market capitalization for user bases and say they are trading at two and three times the price that you are buying a faster growing company, whatsapp , so purely based on a direct head to head comparison on a market cap per user basis, you say this is a company that could conceivably generate $1 billion in revenue off the user base that is twice the size of twitter.

Facebook itself trading at twice the valuation.

So, you know, it looks like it is at a discount to the acquirer 's own.

You know a lot about m&a and tags.

I am sure there are some happy bankers.

And to be honest, we were talking about this earlier, trish, there was no much work for the bankers to do.

It was all mark zuckerberg going on hikes.

That is what the story is anyway.

It is unclear how much work they have done, but i have to say they probably have provided a lot of free services to facebook , meeting up to this deal, you know how it goes.

It is a client service business.

They probably provided other services before.

Now they are getting paid for those services.

But sequoia, sequoia capital were the only venture capital backers in this deal.

They are doing what we call in the bid a 300 geithner on this thing.

It is based on main -- it is a stunning return.

That is unprecedented.

Paul, they did not have any other venture capital bankers.

Whatsapp i am sure could have raised money from other venture capital firms.

I am wondering if you find that weird and if that is statement about the company's e those and how it wants to remain in control because -- the company's ethos and how it wants to remain in control because of they sold more they would have less control?

Something like 30 engineers, 30 four employees total, they have not spent a dime on marketing.

Further, the founders had made significant money at yahoo!, which they then turn around and put into the company themselves, so basically did not want the money in wanted the control.

They end up with it and walking away with what like a $60 million investment turning, they hope, into $19 billion.

Thank you so much, paul kedrosky, bloomberg contributor editor, and deals reporter cristina alesci.

? all right, moving and shaking at this hour, tesla motors and ceo elon musk reported fourth- quarter earnings that beat estimates.

They also revealed plans to wrap up reduction of the model s sedan.

Shares are up more than 10% in premarket trading.

Mr.

muska slope to "in the loop" -- mr.

Musk spoke to "in the loop" betty liu.

This text has been automatically generated. It may not be 100% accurate.

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