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WhatsApp Gets a Warm Welcome Into Facebook

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Facebook reported earnings today and yay whatever Facebook earnings, but it also filed pro forma financials for its WhatsApp acquisition, and that is where the real fun is. They are silly. Here, for instance, is the pro forma income statement for the first six months of 2014 (in millions):

One thing to notice is that acquiring WhatsApp would have reduced Facebook's first-half net income by almost half, though that is more an artifact of accounting than a real thing. A more real thing to notice is that WhatsApp actually had $15 million in revenue in the first half. WhatsApp had 450 million users in February, when Facebook announced the acquisition; it's over 600 million now. Using the lower number, those users provided about 3.3 cents in revenue in the first half, which annualizes, I'm pretty sure, to about 6-7 cents a year. WhatsApp charges nothing for the first year, and 99 cents a year for each additional year. That is not very much money, but it is more than 7 cents a year. Or, I mean, 99 cents is. Some dumb simple math suggests that at least 93 percent of WhatsApp users are still on their free trial.

Here's another good one:

That's from the allocation of the purchase price. We'll get to the goodwill, but first let's talk about the "Acquired users." Let's say there are 600 million of them. They're worth about $3.38 each, to Facebook, as a matter of generally accepted accounting principles, and they have a useful life of seven years. Do you use WhatsApp? How do you feel about your seven-year useful life? To be clear, that's your useful life as a WhatsApp user, not as a member of society, and frankly it seems a little long. WhatsApp has been around for just five years and, like I said, 93 percent of its users seem to be on their one-year free trial. Really seven years is a long time for any messaging app. Seven years ago I had a Blackberry.

Anyway, given that seven-year useful life, you get each user being worth about 50 cents a year, as a matter of GAAP accounting. That number is ... sort of random? Less than WhatsApp is supposed to charge? But more than it's currently actually getting from users? *Shrug emoticon*, as the kids say, on the WhatsApps.

Oh and then there is the goodwill. I don't know what to say about that, that is how accounting works, if you pay $19 billion for a thing you have to allocate all the money somewhere, and if the thing is just some guys in a room then you allocate most of it to goodwill, which just means, "We had nowhere else to put it." Importantly, it means you don't amortize it: Facebook will amortize those $2 billion worth of users over seven years, reducing net income by $289 million a year, but that $15.3 billion of goodwill will just sit on its balance sheet until WhatsApp meets the inevitable fate of all social-media things.

OK just one more, the pro forma balance sheet as of June 30, 2014:

On June 30, the market valued Facebook at about $175 billion. But GAAP accounting valued it at $20.8 billion. That's mostly cash and securities and buildings and stuff; Facebook's user base and network effects and being Facebook counted for about zero to GAAP, though it counted for a lot with the market. But then it paid $19 billion for WhatsApp, some of that in cash but most of it in stock. And the way accounting works is, if you paid $19 billion for something, then you got $19 billion worth of stuff, and if the stuff was just a pile of beans then by golly those beans must be magic. Subtract the cash it paid and some other adjustments, and Facebook increased its GAAP value by $14 billion, to $34.7 billion for the combined Facebook-WhatsApp.

So Facebook did an acquisition

  • worth around 11 percent of its market value,
  • that increased its revenue by 0.3 percent,
  • that decreased its net income by 47 percent,
  • and that increased its book value by 67 percent.

People make fun of tech froth, and, I mean, sure, why not, Facebook did pay $19 billion for a company with $10 million in 2013 revenue, but here regular old accounting comes off looking just a bit silly as well.

  1. That is, WhatsApp's net loss was only $233 million. The other $438 million in losses is allocation of expenses related to the acquisition and doesn't really count.

  2. That is, $15 million in semiannual revenue = 31 million users paying $0.99 a year, out of 450 million users, so 419 million out of 450 million (93 percent) don't pay. Obviously if the denominator is really 600 million then that proportion is higher. My understanding is that not everyone actually pays the fees, even after the first year, but I have no idea.

    When the deal was announced, I made a dumb joke about it having zero revenue, and everyone was like, "No no no it has tons of revenue, $1 a year for 450 million users!" I was basically right though.

  3. Obviously if Facebook paid about $19 billion total for WhatsApp, the users are worth about $31.67 each, fully allocated to users. But GAAP allocates only a (smallish!) portion of the purchase price to the users.

  4. "WhatsApp me your answer," I'd say, but I don't have WhatsApp, so you'll have to leave a comment or e-mail or tweet or Ello or just mutter quietly to yourself, all of those work.

  5. Again I can't quite believe that but there it is in the financial statements.

  6. That's:

    • $19 billion acquisition price on $175 billion market cap.
    • $15 million of incremental first-half revenue on $5,412 million.
    • $762 million of pro forma first-half net income on $1,433 million.
    • $34.7 billion of pro forma book value versus $20.8 billion.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net