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Issue of the week: Facebook’s $19B WhatsApp deal

Facebook agreed to pay $19 billion for WhatsApp, a 5-year-old business with 50 employees and revenues of $20 million.

Silicon Valley types are always asking each other, “What’s your number?” said Nick Bilton in NYTimes.com. Well, “we now know the answer to that question” for Brian Acton and Ukrainian-born Jan Koum, the founders of the mobile messaging company WhatsApp: “a mind-bending $19 billion.” Facebook last week agreed to pay that huge sum for WhatsApp, a 5-year-old business with only 50 employees, which is suddenly “worth more than Alcoa, Campbell Soup, Coach, Gap, Harley-Davidson, Kohl’s, Macy’s, Southwest Airlines, and Xerox.” The $19 billion figure may sound “surreal,” but “these are heady times in technology.” WhatsApp’s jaw-dropping price is unlikely to burst Silicon Valley’s bubble. It’s more likely, in fact, to up the ante, setting a new target for “what other tech companies will be willing to sell for in the future.”

It’s definitely a crazy number, said Dennis K. Berman in The Wall Street Journal. But it’s “not as crazy as I thought” when the news first broke. For Facebook, WhatsApp may actually be a good buy even at that price, thanks to the startup’s “dumb, elephantine hugeness.” The service already boasts 450 million users, most of them outside the U.S., where its $1 annual charge is a small price to pay to avoid exorbitant texting charges from cellphone providers. And even though WhatsApp pulled in a minuscule revenue of $20 million last year, I suspect it turns a profit thanks to its low overhead costs. Recouping $19 billion from WhatsApp users won’t be easy, but the purchase gives Facebook “a hook into hundreds of millions of customers, who may get shoved over to Facebook, and its ad platform, in ways” that CEO Mark Zuckerberg hasn’t even “dreamed of yet.”

Facebook is taking a page out of “the Procter & Gamble playbook,” said Dave Knox in AdAge.com. By building a diverse “house of brands,” the company is switching gears as it seeks to grow. Most of Facebook’s earlier purchases were “either acqui-hires for the talent or foundations for future Facebook features.” But the Whats-App purchase—like Facebook’s $1 billion deal to buy the photo-sharing service Instagram in 2012—is part of a new strategy like the one “that built the great packaged-good companies like P&G, Unilever, and Nestlé.”

It’s definitely a “strategic shift,” said Vauhini Vara in NewYorker.com. Facebook knows exactly “how quickly Internet companies lose their edge compared with businesses in more mature industries.” With its acquisition of WhatsApp, the social-networking company is once again “playing up the independence” of its acquisitions. The plan here is to build a “Facebook of the future,” growing the company by building—or, in this case, buying—new brands that operate under the Facebook banner. WhatsApp’s true value remains an open question, but as Facebook continues on this acquisition strategy, its real challenge will be to choose the right targets: “companies that are different enough from Facebook to stand alone, but not so far afield that the companies don’t make sense together.”

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