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Facebook Plans To 'Dominate Mobile Real Estate' With WhatsApp

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Facebook (NASDAQ: FB) spent a colossal amount of money to acquire WhatsApp, a mobile messaging app.

The deal -- which includes $4 billion in cash and $12 billion in Facebook stock -- greatly exceeds the $1 billion price tag associated with Instagram. It also exceeds the $3 billion offer to acquire Snapchat.

Why would Facebook pay so much money for one app?

"I think it's along the lines of what Facebook is trying to do -- dominate real estate on mobile," Sterne Agee analyst Arvind Bhatia told Benzinga. "It's not about where revenue or users are gonna be tomorrow, but where users are gonna be two years out, three years out."

"For me it's really two aspects of what Facebook is considering," Eleni Marouli, an advertising analyst at IHS Technology, told Benzinga. "Firstly, cutting down the competition -- not just WhatsApp being a messaging service but also worrying about other companies like Google buying WhatsApp before they do."

According to CNNMMoney, Google offered to buy WhatsApp for $10 billion.

"Secondly, although there's not a clear monetization strategy, the data that WhatsApp can provide is of huge value to Facebook's advertising product," Marouli added.

Related: Facebook Announces $16B Merger With WhatsApp; Stock Falls

Strategic Moves

Jack Kent, a mobile analyst at IHS Technology, told Benzinga that, regardless of the price, WhatsApp is a "good strategic move for Facebook."

"The risk of WhatsApp and its massive user base and very high engaged user base falling into the hands of a competitor or driving engagement away from Facebook is one that could have a very big impact on Facebook's core business," said Kent. "In that context, not thinking about the pricing much, but the deal makes a lot of sense for Facebook."

Too Much Cash, Too Many Competitors

Mark Little, a principal analyst in Ovum's Consumer Services team, told Benzinga that the cash piles, as well as the industry's competitive nature, are driving up prices for startups.

"Obviously my initial reaction was, 'That's a lot of money,' but this is why the Internet giants -- the Amazons, Facebooks, Apples, Microsofts, Googles -- have got such powerful cash," said Little. "All together that's probably over half a trillion between them. This is what's driving the price -- it's the potential rivalry between six or seven companies with very large piles of cash."

In the end, Little does not believe that the acquisition price matters as much as the fight for future existence.

"It's a very high-powered battle that is going on amongst the six or seven Internet giants," Little added. "And that means they are using a very big war chest to fight that battle, so we shouldn't be surprised [about] big figures for what appears to be fairly small startups."

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.

Latest Ratings for FB

DateFirmActionFromTo
Aug 2014Janney CapitalDowngradesBuyNeutral
Jul 2014BarclaysMaintainsOverweight
Jul 2014Canaccord GenuityMaintainsBuy

View More Analyst Ratings for FB
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