Buying an idea

Facebook’s acquisition of smart phone messaging service facilitator WhatsApp involved one of the biggest deals in merger and acquisition history and would defy conventional business logic.

The world’s biggest social networking company will pay a whopping $ 19 billion for the four-year-old upstart company which has just 55 employees. Two years ago Facebook’s buyout of Instagram at $ 1 billion was considered overpriced. There have been many other seemingly out-of-this-world deals in the virtual world. But the standards of their valuations are different and so comparisons may not be of much use.

WhatsApp has no solid assets and no business model based on subscriptions or advertisement. Its message service is committed against carrying ads. One condition for its merger was that it will continue to be so. But it made sense for Facebook to bring it in its stable.

WhatsApp  has seen a high surge of popularity in the young segment of population in almost no time, with about 450 million users worldwide. It is fast gaining  more momentum and may emerge as a competitor for Facebook in the markets in Europe and emerging countries which are still expanding. Facebook has a billion users but it is slowing down. Some recent concerns over privacy have not gone away.

New platforms like Twitter are strong. Social media users are not known for loyalty and even the leader may find the ground under it slipping away. WhatsApp provides a large and growing footprint to bank on. Facebook has been looking for such expansions. It had made an offer to buy a photo messaging service company Snapchat some time ago, which was rejected.

Acquiring younger and more dynamic competitors are the best way to beat them, and that is what Facebook has done, spending about one-tenth of its own market worth. It now has the challenge of proving that the returns in future are worth the investment. WhatsApp has a different culture and practices and Facebook will have to ensure that these are maintained and respected.

With WhatsApp, Facebook is suddenly much more than its own big self. If the chemistry works well it can offer greater competition to other internet giants like Google. But it might also show a weakness. Facebook has become too big and established to create new ideas from inside and has to buy them in the market.