Facebook Values WhatsApp Like Miracle Drug: Real M&A

Facebook Inc.’s $19 billion purchase of WhatsApp Inc. is valuing the text-messaging service at a multiple investors currently only bestow on companies developing life-saving drugs.

Based on a goal of reaching 1 billion WhatsApp subscribers, Facebook is buying the mobile application for about 19 times estimated sales, according to data compiled by Bloomberg. The only U.S. companies that fetch such lofty valuations are drugmakers that are developing treatments for cancer, Crohn’s disease and other ailments, the data show.

While the price tag may seem steep at first blush, Facebook is betting it will prove a lucrative long-term investment. The mobile-messaging service could help Facebook generate more growth from younger users that are slipping away, according to FBN Securities Inc. The dollar amount being paid per WhatsApp user is about a third the value Facebook shareholders place on the social media company’s own user base, data compiled by Bloomberg show.

“It’s a staggering amount,” Roger Entner, an analyst at Dedham, Massachusetts-based Recon Analytics LLC, said in a phone interview. “It’s 19 billion reasons why mobile matters and why it is the future of Facebook.”

WhatsApp, which has more than 450 million monthly users currently, is “on a path to reach over 1 billion people worldwide in the next few years,” Mark Zuckerberg, Facebook’s co-founder and chief executive officer, said on a conference call with analysts yesterday after the companies announced the takeover.

High Valuation

Subscribers use the messaging app for free for the first year and are charged 99 cents a year after that. One billion paying users would translate into about $1 billion in annual sales, bringing the projected revenue multiple that Facebook is paying to 19, data compiled by Bloomberg show.

Only 35 U.S.-based publicly traded companies have a price-sales ratio of 19 or higher, according to data compiled by Bloomberg based on analysts’ estimates for three years from now. All are in the biotechnology or pharmaceutical industry, including companies such as Puma Biotechnology Inc., which has an experimental breast-cancer treatment, the data show.

WhatsApp has turned itself into the next Facebook, as it adds more than 1 million users daily, said Tom Taulli, who analyzes acquisitions for MasterCFO.com. The messaging service offers a new source of revenue and growth for the 10-year-old social media company, he said.

Paying Up

“If Facebook wants to keep growing, it’s going to have to pay premium prices to do it,” said Taulli, who is based in Los Angeles. “They’re going to have to do deals that make a difference and that means huge user bases, very entrenched, very important parts of the market, and it also means that they know they’re going to have to pay top dollar for it.”

Facebook said in October that younger teens aren’t using its website as much as they used to. The company offered about $3 billion to acquire Snapchat Inc., a person familiar with the matter said in November, in an apparent push to recapture younger consumers. The start-up turned down the offer for its app, which lets users send annotated photos that disappear.

Shares of Facebook rose 2.3 percent to $69.63 today.

While Facebook may view the WhatsApp acquisition as an important strategic step in mobile messaging, it’s overpaying, said Entner of Recon Analytics.

“It’s ludicrous,” he said. “It reminds you of the dot-com bubble all over again. We’re heading toward a bubble, if we’re not already there, with what they are paying.”

‘Strategic Sense’

WhatsApp’s growth may be tempered in the U.S. as phone carriers begin offering free messaging services, Entner said.

Facebook’s market value of $173 billion yesterday is equal to 144 times its 1.2 billion monthly active users. The Menlo Park, California-based company is paying about 42 times WhatsApp’s user base, or $42 per subscriber, data compiled by Bloomberg show. By comparison, Tokyo-based Rakuten Inc. bought the Viber Internet messaging and calling service for $900 million earlier this month, paying about $3 per Viber user, data show.

The WhatsApp takeover “looks expensive,” Shebly Seyrafi, a New York-based analyst at FBN Securities, said in a phone interview. “But I think this deal makes a lot of strategic sense. They can eventually get to 1 billion subscribers. So the valuation isn’t necessarily out of whack for a company that’s growing extremely fast.”

Before it's here, it's on the Bloomberg Terminal.