PT MBA 2nd Year Trimester VI,

NMIMS

The billion dollar acquisition of

WhatsApp by Facebook Subject – Strategy Implementation

Submitted by:

Neha Kumar – A029

Rashi Kapur – A039

Sonal Rajadhyax – A050

Tarannoom Rehmani – A053

Yuvraj Tandon – A059

Facebook www.facebook.com

Facebook is an online social networking service founded on February 4, 2004 by Mark

Zuckerberg with his college roommates and fellow Harvard University students Eduardo

Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes. The founders had initially limited

the website's membership to Harvard students, but later expanded it to colleges in the Boston area,

the Ivy League and Stanford University. It gradually added students at various other universities before

it opened to high-school students, and eventually to anyone aged 13 and over. Facebook now allows

anyone who claims to be at least 13 years old to become a registered user of the website.

In 2012, Facebook was valued at $104 billion, and by January 2014 its market capitalization had risen

to over $134 billion. At the end of January 2014, 1.23 billion users were active on the website every

month, while on December 31, 2013, 945 million of them were identified by the company as mobile

users.

History

Zuckerberg wrote a program called Facemash on October 28, 2003 while attending Harvard as

a sophomore. The site used photos compiled from the online facebooks of nine houses, placing two

next to each other at a time and asking users to choose the 'hotter' person. To accomplish this,

Zuckerberg hacked into protected areas of Harvard's computer network and copied private

dormitory ID images. Facemash attracted 450 visitors and 22,000 photo-views in its first four hours

online.

The site was quickly forwarded to several campus groups but was shut down a few days later by the

Harvard administration. Zuckerberg faced expulsion and was charged by the administration with

breach of security, violating copyrights, and violating individual privacy. Ultimately, the charges were

dropped.

The following semester, Zuckerberg began writing code for a new website in January 2004. On

February 4, 2004, Zuckerberg launched "Thefacebook" and received its first investment later that

month from PayPal co-founder Peter Thiel.

Traffic to Facebook increased steadily after 2009. More people visited Facebook than Google for the

week ending March 13, 2010. In March 2012, Facebook announced App Center, a store selling

applications that operate via the site. The store is now available to iPhone, Android and mobile web

users.

Facebook held an initial public offering on May 17 2012, negotiating a share price of $38 apiece. The

company was valued at $104 billion, the largest valuation to date for a newly listed public company.

Management

The ownership percentages of the

company, as of 2012, are:

Mark Zuckerberg: 28%

Accel Partners: 10%

Digital Sky Technologies: 10%

Dustin Moskovitz: 6%

Eduardo Saverin: 5%

Sean Parker: 4%

Peter Thiel: 3%

Greylock Partners: 1 - 2%

Meritech Capital Partners: 1 - 2%

Microsoft: 1.3%

Li Ka-shing: 0.8%

Interpublic Group: < 0.5%

Social impact

Facebook has affected the social life and activity of people in various ways. The website is the most

popular for uploading photos, with 50 billion uploaded cumulatively. With its availability on many

mobile devices, Facebook allows users to continuously stay in touch with friends, relatives and other

acquaintances wherever they are in the world, as long as there is access to the Internet. It can also unite

people with common interests and/or beliefs through groups and other pages, and has been known to

reunite lost family members and friends because of the widespread reach of its network.

Some argue that Facebook is beneficial to one's social life because they can continuously stay in

contact with their friends and relatives, while others say that it can cause increased antisocial

tendencies because people are not directly communicating with each other.

Vision and Mission

In Zuckerberg’s words, “Facebook was started not just to be a company, but to fulfill a vision of

connecting the world.”

He elaborates the mission statement as “Our mission is to make the world more open and

connected. We do this by giving people the power to share whatever they want and be connected

to whoever they want, no matter where they are."

The three pillars outlined for this strategy are:

1. To build the best and most ubiquitous mobile product

2. To build a platform where every new app that is created can be social and enable people to share

3. To build strong monetization and economic engine that will build Facebook into one of the world’s

most valuable companies

WhatsApp www.whatsapp.com

WhatsApp is an early stage technology startup; a publicity-shy 55-person outfit based down the road

from Facebook.It offers the WhatsApp Messenger which is a cross-platform instant

messaging service for smartphones. In addition to text messaging, users can send each other images,

video and audio media messages as well as their location using integrated mapping features. Unlike

many companies in Silicon Valley, which drink up as much funding as possible, it was run leanly on

funding of about $60m, half as much as the much smaller Snapchat. Unlike most internet companies, it

does not take advertising, instead charging a modest subscription fee of $1 a year from users.

But quietly, over four years, it grew to almost half the size of Facebook. Lured by the promise of a

cheap and fast alternative to text messaging, 450 million users log on every month with a million more

joining each month. As of January, 2014, 400 million photos are shared each day, and the messaging

system handles more than 10 billion messages each day.

The billion dollar Acquisition

On February 19, 2014, Facebook Inc. announced it is acquiring WhatsApp Inc. for US$19 billion.

Facebook, who was advised by Allen & Co, will pay $4 billion in cash, $12 billion in Facebook shares

and $3 billion in restricted stock units to be granted to WhatsApp founders and employees that will

vest over four years. The transaction is the largest purchase of a company backed by venture

capitalists.

The $19billion price tag is definitely aggressive; with many Wall Street analysts downgrading

Facebook from ―buy‖ to ―hold‖ soon after the deal was announced. However, as Facebook embarks

on a strategy to develop a portfolio of apps to help the company hang on to users adapting to mobile,

owning a messaging service, so core to the use of a phone, may not be a bad idea.

Facebook’s billion dollar acquisition of messaging service Whatsapp, announced last month, is one of

many signs of large businesses’ insatiable appetite for customer data and better reach to a younger

audience. One example is the $1.1 billion Yahoo acquisition of Tumblr, which many described as a lot

of money for a list of names. An even larger example is Microsoft ’s $8.5 billion purchase of Skype,

where they paid a premium way above what they might have to get customer data.

The big appeal of this instant-messaging app that works across all smartphones was that it was nearly

free - barring the low cost of a basic mobile data plan - unlike SMS text. And it caters to those you care

about most: the people in the address book on your phone. WhatsApp did to SMS what Skype did to

international phone calls.

Its most popular feature today is its handling of groups. That one thing takes it into the realm of social

media. WhatsApp groups are the new social groups in many of the countries. The average school kid

today - many of whom are by choice not on Facebook - belongs to at least a half-dozen WhatsApp

groups.

WhatsApp is a clear leader in mobile messaging in countries like India, Brazil, Europe and Latin

America. A big reason for this success is the inflexible focus by the two founders of WhatsApp - very

much like Google's focus - on speed and simplicity. The company's product philosophy, scribbled on a

cheap notepaper by its American co-founders Brian Acton and pinned on Ukrainian co-founder and

CEO Jan Koum's desk, says it all: 'No Ads, No Games, No Gimmicks'.

Whatsapp has been the top driver for smartphone penetration in emerging markets. Meanwhile

Facebook has broadened its scope with the 'Facebook for Every Phone' app. Together; the two add up

to a potent army driving up connected smartphone usage.

The Strategy behind this Acquisition

$19 billion dwarfs almost everything else about the Facebook-WhatsApp deal. And when it comes to

money matters- almost everyone seems worried about how Facebook is planning to get returns on this

massive investment.

Advertisement revenues indeed form the financial bedrock of Facebook. It's no secret that the portion

of a brand's Facebook fans who see posts that aren’t supported by ad spend is dropping. Many brands'

organic reach via Facebook has been declining and eventually, there may be no space left for brands

that haven't paid to promote their posts.

WhatsApp owners, on the other

hand, have been vocal about being

averse to advertisements on their

messaging platform. They also seem

to be antipathetic to most other

existing ways of making money

from consumer internet services.

There may be no greater testament to

the viral nature of WhatsApp than

the fact that the company has

accomplished all this without

investing a penny in marketing.

Unlike their smaller competitors, it

hasn't spent anything on user

acquisition. Yet like the world's

greatest brands, it's created a strong

emotional connection with

consumers. All of WhatsApp's growth has come from happy customers encouraging their friends to try

the service.

The acquisition thus, though high on strategic value, is becoming difficult to justify in terms of metrics

that Facebook is generally valued against. A detailed analysis of the move reveals the following

probable reasons behind the acquisition:

In 2012, Facebook monthly users increased by more than 17%. In 2013 however, growth of

monthly users slowed to 11%. Even more troubling is that the more profitable U.S. and Canadian

demographic only had a 3% increase in users in 2013, compared with 5.5% increase in 2012.

In October 2013, for the first time, Facebook acknowledged many investors’ concerns — that

Facebook is experiencing slowing growth in daily users, especially in the key teen demographic. In

2012, Facebook was the primary social networking site for teenagers but, this year Twitter has

overtaken Facebook as the number one social networking website. As teens' log-off from

Facebook, people aged 30 and over were logging-in. The older generation began signing up in

2010 as a lot of these users were apparently parents who wanted to spy on their kids. At this point,

Facebook was starting to look like a mature blue-chip company that has mostly saturated its

potential market share.

Facebook had enough cash on hand to ―purchase‖ users and generate growth. It recognized that

organic growth is slowing and they need other means to grow revenue. The WhatsApp purchase

allows Facebook to acquire a company that already has an impressive number of monthly users,

and more importantly, a company that is growing their user base.

Facebook, the world's No.1 social network with 1.2 billion users, generates the majority of its

revenue by showing ads that target users by age, gender and other traits. Facebook routinely makes

use of user information for advertising purposes and can now incorporate the data of WhatsApp

users into the user profiling business model. Information analysis is a challenge facing Facebook

and other companies that make acquisitions with data, better knowledge of customers’ spending

habits and a better reach in mind. But if this area is managed properly, a treasure trove of

information can be monetized.

Facebook has proved it can monetize the mobile platform, generating more than half of

its advertising revenue from its apps, and mine user data to give marketers increasingly accurate

targeting.

If we carefully translate their mission statement, it conveys to every user that ―your social life over

the internet will be conducted via our network‖.

WhatsApp, like Instagram, before Zuckerberg bought that too, was muscling in on Facebook’s turf.

It is not only massively popular among the younger users abandoning Facebook but a phenomenon

in Asia and Africa, where smartphones are getting cheaper but text messaging is still prohibitively

expensive. As his company’s growth slows down in the rich world, Zuckerberg can’t afford to see

Facebook’s geographical reach

Monthly active users (MAUs)

per region, Dec. 2013

another internet service become the go-to form of communication for the 6 billion or so people that

don’t have Facebook.

WhatsApp offers levels of engagement even higher than Facebook with more than 70 per cent of

WhatsApp users coming back every day and sending almost as many messages as text messages

sent in the world. Facebook’s strategy thus would be to grab control of as much of the internet as

possible, by eliminating any threat necessary.

Facebook has not been successful with its mobile chat apps and therefore, the company has decided

to invest in the leader of that sector. The rise of mobile has lived up to the hype and is set to grow

further.

WhatsApp has been a serious threat to global carriers’ business for the past 3 to 4 years.

Companies like Vodafone and Telefonica, with 800 million customers worldwide, were challenged

by this tiny startup’s freemium model, which eroded their revenue from text messaging. Over the

top messaging services (OTT), where content is delivered via the Internet instead of through

mobile networks, resulted in phone carriers losing $33 billion in texting fees.

WhatsApp enabled users to move between countries with a single mobile identity. Customers took

advantage of carriers’ cheap data plans (especially low in highly competitive mobile markets), and

combined them with free, flexible, and easy to use OTT options like WhatsApp to get the most

functionality for the lowest cost.

The convergence of mobile and social networks has made it difficult for carriers to compete with

free OTT services, forcing them to reconsider longstanding business models. Facebook has the

product and design expertise to rediscover and reclaim the value carriers have lost in recent years.

The company has proven adept at understanding user needs and building products that serve those

needs, which is a strong foundation for developing new monetization strategies.

This acquisition represents the first of many strategic moves to facilitate the communications habits

of users across the globe, rather than simply folding new users into Facebook’s existing businesses

and extracting value accordingly.

By keeping WhatsApp independent, Facebook aims to dominate global communications— not just

social networking. It now appears to be building an ecosystem including photo-sharing app

Instagram and WhatsApp that could help it dominate the mobile segment of global communication.

Financials

Income statement

Period ending 31/12/2013 31/12/2012 31/12/2011 31/12/2010

Total Revenue $7,872,000 $5,089,000 $3,711,000 $1,974,000

Cost of Revenue $1,875,000 $1,364,000 $860,000 $493,000

Gross Profit $5,997,000 $3,725,000 $2,851,000 $1,481,000

Operating Expenses

Research and Development

$1,415,000 $1,399,000 $388,000 $144,000

Sales, General and Admin.

$1,778,000 $1,788,000 $707,000 $305,000

Non-Recurring Items

$0 $0 $0 $0

Other Operating Items

$0 $0 $0 $0

Operating Income

$2,804,000 $538,000 $1,756,000 $1,032,000

Add'l income/expense items

$6,000 $7,000 ($19,000) ($2,000)

Earnings Before Interest and Tax

$2,810,000 $545,000 $1,737,000 $1,030,000

Interest Expense $56,000 $51,000 $42,000 $22,000

Earnings Before Tax

$2,754,000 $494,000 $1,695,000 $1,008,000

Income Tax $1,254,000 $441,000 $695,000 $402,000

Minority Interest ($9,000) ($21,000) ($332,000) ($234,000)

Equity Earnings/Loss Unconsolidated Subsidiary

$0 $0 $0 $0

Net Income $1,491,000 $32,000 $668,000 $372,000

Cash Flow statement

Period Ending: 31/12/2013 31/12/2012 31/12/2011 31/12/2010

Net Income $1,491,000 $32,000 $668,000 $372,000

Cash Flows-Operating Activities

Depreciation $1,011,000 $649,000 $323,000 $139,000

Net Income Adjustments

$1,035,000 $1,409,000 $191,000 $46,000

Changes in Operating Activities

Accounts Receivable

($378,000) ($170,000) ($174,000) ($209,000)

Changes in Inventories

$0 $0 $0 $0

Other Operating Activities

$213,000 ($463,000) ($29,000) ($44,000)

Liabilities $841,000 $134,000 $238,000 $160,000

Net Cash Flow-Operating

$4,222,000 $1,612,000 $1,549,000 $698,000

Cash Flows-Investing Activities

Capital Expenditures

($1,362,000) ($1,235,000) ($606,000) ($293,000)

Investments ($883,000) ($4,876,000) ($2,399,000) $0

Other Investing Activities

($379,000) ($913,000) ($18,000) ($31,000)

Net Cash Flows-Investing

($2,624,000) ($7,024,000) ($3,023,000) ($324,000)

Cash Flows-Financing Activities

Sale and Purchase of Stock

$1,504,000 $6,777,000 $1,026,000 $506,000

Net Borrowings ($1,891,000) $1,335,000 ($261,000) $160,000

Other Financing Activities

($889,000) ($2,862,000) $0 $0

Net Cash Flows-Financing

($667,000) $6,283,000 $1,198,000 $781,000

Effect of Exchange Rate

$8,000 $1,000 $3,000 ($3,000)

Net Cash Flow $939,000 $872,000 ($273,000) $1,152,000

Financial Ratios

Period Ending: 31/12/2013 31/12/2012 31/12/2011 31/12/2010

Liquidity Ratios

Current Ratio 1188% 1071% 512% 577%

Quick Ratio 1188% 1071% 512% 577%

Cash Ratio 1041% 915% 435% 459%

Profitability Ratios

Gross Margin 76% 73% 77% 75%

Operating Margin

36% 11% 47% 52%

Pre-Tax Margin 35% 10% 46% 51%

Profit Margin 19% 1% 18% 19%

Pre-Tax ROE 18% 4% 35% 47%

After Tax ROE 10% 0% 14% 17%

Competition

For the new social-media sector, analysts focus on ―Number of Monthly Users.‖ Below are the top four

social media stocks ranked by market capitalization.

Company Market Cap (millions) Number of Monthly

Users (millions)

Revenue (millions)

Facebook $173,540 1,230 $7,870

LinkedIn $23,530 277 $1,530

Twitter $20,130 243 $665

Pandora $7,320 73 $655

From this table we can see that a higher number of users tend to correlate with higher market cap and

revenue.

As we have seen, Facebook is having trouble generating new users organically, which helps explain

the recent purchase of WhatsApp for $19 billion. WhatsApp has also recently announced that it is

adding a voice service as well, putting more pressure on telecom companies. The valuation seems to

make sense when looking at its monthly users compared with Twitter and LinkedIn. Facebook is

paying less for WhatsApp than the current market cap of LinkedIn and Pandora, yet it has more

monthly users than either of them.

What’s next on Facebook's shopping list?

Facebook is in talks to buy a solar-powered drone startup Titan Aerospace for about $60 million in

what could lead to making wireless Internet available in regions without online access. The effort

would help advance Facebook's Internet.org effort, aimed at connecting billions of people who do not

currently have Internet access in places such as Africa and Asia.

There are a few monetization products also that Facebook is excited about, and he believes will

increase monetization in the long term:

Mobile App Installs – which Facebook uses to provide distribution to increase discovery for app,

so that developer can get more people to use it.

Facebook Exchange and Custom Audiences – which can improve targeting capabilities so ads are

relevant and interesting to people on FB

Gift launch – though it is in its early days, Zuckerberg sees an opportunity to bring more commerce

to FB over time, and gifts is the logical first step. Millions of birthday message are already sent

every day, he said, and people asked to do more. Gifts provide an opportunity to learn about how

people buy things and will help Facebook build better services in future.

Overall, Facebook CEO Mark Zuckerberg said that Facebook's latest acquisition of WhatsApp and its

possible future acquisitions would be closely related to the Internet.org vision of the company. The

vision for Internet.org is as follows: "The idea, he said, is to develop a group of basic internet services

that would be free of charge to use — 'a 911 for the internet.' These could be a social networking

service like Facebook, a messaging service, maybe search and other things like weather. Providing a

bundle of these free of charge to users will work like a gateway drug of sorts — users who may be able

to afford data services and phones these days just don’t see the point of why they would pay for those

data services. This would give them some context for why they are important, and that will lead them

to paying for more services like this — or so the hope goes."