As one of WhatsApp’s 450 million users, I am a fan of the service. Especially when traveling overseas, it’s the perfect way to keep in touch with family and friends without paying outrageous texting charges. The product itself is well engineered: fast, reliable, and without wasteful “eye candy.” Yet, the price tag of $19 billion (in stock, cash and restricted stock units) for Facebook’s acquisition of WhatsApp remains an eye-popping number.
Facebook’s purchase underscores WhatsApp’s phenomenal growth during the past five years (growing faster than Skype, Twitter, Gmail and Facebook itself.) Yet, the fact remains that this is the highest amount ever paid for a startup, representing about $4 for each WhatsApp user (most of whom don’t pay any subscription fee), and $345 million per employee. In their presentation to analysts and investors, which was very light on detail, both Mark Zuckerberg and Jan Koum stressed their belief that growth through providing utility to users comes first, and that monetization will follow. Analyses and opinions about the wisdom of the deal are flying fast and furious – including that, globally, WhatsApp faces tough competition from the likes of similar applications, WeChat and Line – and I’m sure it will take some time for the dust to clear.
Going beyond the valuation issue, there are two strategy puzzles here. The first is about what happens next organizationally. The two companies are to be independently managed (i.e., not integrated), with WhatsApp benefitting from Facebook’s “infrastructure” and deep pockets. In the Q&A with analysts, Zuckerberg mentioned that a similar model had worked well with the Instagram acquisition. Spending this kind of money with minimal integration raises the question of why a less expensive strategic alliance would not have sufficed—for example, a smaller investment without full control could accomplish the alignment they seem to have in mind, including getting Jan Koum to join the board. In other words, how much is competitive preemption worth? Today on CNBC, WSJ’s Dennis Berman called this a digital holding company strategy reminiscent of CMGI, a portfolio of Internet operating companies—which, by the way, didn’t do too well.
The second strategy puzzle is about market reactions as viewed through a cognitive/behavioral lens. TechCrunch reported that Facebook shares were down 5% after the announcement, before bouncing back to a smaller 2.6% loss after Facebook’s conference call with analysts. Based on that observation, you’d think that Zuckerberg and his team managed to reassure the analysts. And yet, the presentation and Q&A were very sketchy – other than Zuckerberg’s sense of excitement, there was little information provided. Even basic questions from analysts, such as what proportion of WhatsApp users pay a subscription, and whether WhatsApp users tend to be younger than Facebook users, went unanswered. Along with Katz doctoral student Eunjoo Yi, I have been studying the effect of communication modalities in these kinds of announcements. From one perspective, elaborating upon deal rationale and addressing questions interactively should help investors make sense of the deal. On the other hand, if the deal is a weak one to begin with, or if there’s considerable dispersion of analyst perceptions, providing too much detail could backfire—which is what Eunjoo and I have found. Either way, unpacking the cognitive and behavioral processes underlying management communication and investor understanding should help. The surprise in the Facebook case is that the management communication was neither clear about the deal rationale nor reassuring in its tone.