WhatsApp is a pearl for sure. The messaging service allows users to avoid text-messaging charges by moving texts across the Internet instead of the mobile phone carrier networks. This can save people who travel, or who live in emerging markets, hundreds of dollars a year, which is why WhatsApp is adding one million new users per day.
At the time of the acquisition in February 2014, WhatsApp had acquired some 450 million users. Their business model is to charge a subscription of $1 per year after their first full year of service. Even if all 450 million WhatsApp users were already paying, that is still less than half a billion in revenue. Why would Facebook acquire WhatsApp for a number that is somewhere north of 40 times revenue?
Nobody know for sure what is in Mark Zuckerberg’s head, but we can only assume that at least part of the opportunity Facebook sees is the opportunity to sell more Facebook ads because of the information they glean from WhatsApp users. Global advertising giant Publicis estimates 2013 online advertising spending in the US alone to be around $500 billion. Presumably Facebook believes they can get a larger chunk of the global online ad buy because they know more about its users by owning WhatsApp.
And therein lies the definition of a strategic acquisition. Most acquisitions run a predictable pattern of industry norms, but a strategic can pay a significant premium for your business because they are looking at your business for what it is worth in their hands. Rather than forecasting out your future profits and estimating what that cash is worth in today’s dollars, a strategic is calculating the economic benefit of grafting your business onto theirs.