Case Submission

Facebook’s Acquisition
of WhatsApp

Ankesh Goyal BJ21071

July 13, 2022
Saarthak Gupta BJ21106
MACR Group 4
Adarsh Nethwewala BJ21124
Pallavi Mehrotra BJ21156
Siddharth BJ21172
 Case background: Facebook had acquired WhatsApp at huge deal size of 19.6 billion dollars in
February, 2014 post its acquisition of Instagram for $1.1 billion
CASE BACKGROUND

Deal Background Deal finances

• Facebook acquired WhatsApp (instant messaging company) at huge deal
size of $19.6 billion in 2014 $19.6 Billion
• WhatsApp in 2014 had just a total of 55 employees with total of 450 million Total Deal Size
active users with 1 million daily users signing
• WhatsApp had negative income, very small revenue stream but very high
growth rate in customer acquisition
$3.6 Billion
• WhatsApp had zero advertisement policy and charged very humble $1 $12 Billion $4 Billion
annual fees from users leading to relatively low realizable revenue Employees
Facebook Share Cash
• Market and analysts in general and business news in particular judged deal compensation
to be highly overvalued compared to WhatsApp intrinsic value, it was 19x
the acquisition value of then recently acquired Instagram

Mobile Connectivity Revenue Model

• Over 450 million active users on WhatsApp, growing by 1 million/year • Low-cost model due to operations of only 55 employees
Why WhatsApp

• Users sharing 8.2 billion messages/day vs Facebook mobile's 3.5 billion • Potential to generate increased revenue by charging of $1 per
• Outperformance in developing markets over competitors like WeChat user post the first year due to the increasing user base by 1
Threat of Substitute million per year of operations
• Curb the competition to recent acquisitions like Instagram while • Possibility of expansion into the domain of mobile advertising
providing it with necessary customer acquisition support which can boost revenues and customer reach for Facebook
• Enhanced user engaged time of WhatsApp, exceeding that of
FB Messenger, with only Snapchat placed between it and Facebook
Source: Darden Business Publishing Facebook’s Acquisition of WhatsApp: The Rise of Intangibles (A)
 Valuation of WhatsApp of $19 billion and the recording entry undertaken by Facebook with
respect to Additional Paid-In-Capital
W H ATSAPP'S $19 B ILLIO N VA LUE

• WhatsApp had incurred a loss of $138 million with negative free cash flows. Most of the cash had been generated through
financing activities taking the cash balance to positive.
Valuation • Hence, Facebook's valuation of WhatsApp at $19 billion was based mostly on non-financial metrics.
of $19 • WhatsApp had added over 450 million users with an expected increase of 1 million per year in future years. It would levy $1 as
billion subscription fee from these users generating immense revenue with minimal costs going into the future.
• Moreover, the desire to eliminate a potential competitor and use the synergies so generated from the acquisition to benefit both itself
and its recent acquisitions (Instagram) motivated Facebook to estimate a higher valuation for WhatsApp.
• Due to these factors, Facebook saw value in WhatsApp and hence the consideration of $19 billion was determined

Entry for • Booking of fair values of all tangibles and intangibles as well as liabilities. The difference in consideration and fair value is Goodwill.
recording • Goodwill represents expected synergies from growth, advertising monetization and strategic entry gained in the SMS ecosystem.

WhatsApp Financials 2013 2012 Particulars Amount (in $ millions)

NOPAT -138.2 -54.7 Value of Assets Acquired 2,783
(+) Depreciation 71 61 Liabilities assumed -932
(-) Capital Expenditure -166 -119 Net Assets 1,851
(-)Net Working Capital changes -18.9 ** Balancing figure Goodwill 15,342
Free Cash Flow for Firm -394.1 ** Purchase Consideration 17,193
Increase in APIC 17,928

Source: Darden Business Publishing Facebook’s Acquisition of WhatsApp: The Rise of Intangibles (A) ** Data not available
 Impact: Effect on key financial ratios and the treatment of intangibles acquired through the
deal in the future years
Key Financial Ratios

Revenue/Net Income Earnings per share Return on Equity

Revenue and Net Earnings per Return on Du Pont Performance

Income
• Enhancement in
revenues from 2014 to
2015 by 44% indicating a
positive acquisition
impact
• Enhancement in net
income by 96%
indicative of positive
synergy impact
share
• Increase in earnings • Increase in the Return
per share of Facebook
by 83% from $0.62 to
$1.12
• The share price of
Facebook post
acquisition had
increased from $68 to
$77 showing positive
investor perception
Equity
on Equity of Facebook
by 3.6% approx.
Indicating a positive
impact of use of
investment by acquirer
for generating earnings
growth
Analysis Pressures
• Pre-Acquisition, Asset • Justification of the huge
Turnover, Profit Margin valuation through enhanced
and Leverage being customer
0.48, 0.19 and 1.12 acquisition/advertising revenue
respectively • Change in valuation parameters
• Post-Acquisition, from number of users to
Margin and Leverage financial parameters adding on
increased to 0.24 and to performance maintenance
1.13 while turnover fell • Maintenance of intangible
to 0.42 valuation by meeting synergies
from expected growth

Goodwill Acquisition:
Treatment of 1 Goodwill represents the brand
2 Test of Impairment
would be
3 Write down will
take place if the 4 Losses so
generated from
Intangibles name, customer base, patents undertaken for expected impairment are
etc. as acquired by Facebook Goodwill annually synergies from not tax-
from WhatsApp. for indicators of future growth are deductible in
decline not generated nature
Source: Darden Business Publishing Facebook’s Acquisition of WhatsApp: The Rise of Intangibles