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Facebook Pays Steep Price to Double User Base in WhatsApp Deal

NEW YORK (The Deal) -- Facebook's (FB - Get Report) stunning $19 billion purchase of mobile messaging company WhatsApp will bolster the social media company's user base and its growing strength in wireless.

WhatsApp has more than 450 million users per month, and Facebook founder and CEO Mark Zuckerberg said it is on track to hit 1 billion. Facebook itself closed 2013 with more than 1.2 billion users.

WhatsApp co-founder and CEO Jan Koum will take a seat on Facebook's board.

The payout for the acquisition, announced Wednesday, includes 
$4 billion in cash and $12 billion in Facebook stock. Facebook has also reserved $3 billion in restricted stock units vesting in four years for Whats-
App employees.

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Zuckerberg approached Koum on Feb. 9 with a general proposal for a deal. The two had follow-up discussions and negotiated a price later in the week.

Facebook will allow WhatsApp to operate independently, as it did with its 2012 purchase of Instagram for the then-extravagant price of $1 billion. "We feel like we've learned from the Instagram experience," the Facebook founder and CEO said during a conference call.

Zuckerberg said it would be "pretty stupid for us to interfere in a big way" with WhatsApp.

"I mean with 50 people at their company they have built a product and a network that has almost half-a-billion people actively using it in five years," Zuckerberg told investors during the call. "No one in the history of the world has done anything like that before."

While the price is staggering, Cowen & Co. analyst John Blackledge noted in a report that Facebook is paying less than $42 per monthly average user, compared to the $45 per monthly user it paid for Instagram.

"The Instagram deal has turned out to be a big success as we estimate it will be the second biggest social network ending 2014 and is starting to monetize its platform," Blackledge wrote.

WhatsApp adds 10 users per second, Cowen estimated, compared to Facebook's rate of 5.4 per second and Instagram's 3.5 per second.

UBS (UBS - Get Report) estimated that WhatsApp could generate $1 billion in sales in two years, and that its profitability could exceed Facebook's projected 61% Ebitda margin.

Facebook said that 70% of WhatsApp users are active on a daily basis. SNL Kagan analyst Seth Shafer said the daily usage rate is an impressive figure, considering that Facebook's daily rate is closer to 60%. "They may be paying a premium for that engagement," Shafer said.

WhatsApp has a small yearly subscription fee and has recurring revenue. Other messaging companies have experimented with games and other methods of monetizing their service.

"It's the only one that has charged a subscription for the core service," Shafer said.

The Deal reported last summer that WhatsApp or Viber Media Inc. could be a target for Yahoo! Inc. (YHOO - Get Report) to help the company increase its exposure to the youth market.

At the time, a WhatsApp spokeswoman said, "We spend all our time thinking about our users and our product. We don't think about exit scenarios."

Japanese Internet retailer Rakuten recently said it would buy Viber for $900 million. Other large messaging services include Tencent's WeChat, Nimbuzz and Line Corp.

However, Shafer suggested that smaller players such as TangoME and Kik Interactive could be more likely targets now that WhatsApp and Viber are off the market.

WhatsApp allows users to avoid additional text messaging fees because its services are provided via the Internet, rather than through telecom providers.

The acquisition could draw attention from regulators, especially if WhatsApp and other applications draw substantially greater traffic away from telecoms' texting services.

"What Facebook has not bargained for is that it could tread into unknown waters of regulation and possible legal action," Frost & Sullivan research director Vidya Nath wrote in a Thursday note.

Facebook could have to pay WhatsApp 
$1 billion in cash and another $1 billion stock as a termination fee if regulators squelch the deal.

Allen & Co. provided financial advice to Facebook. A team from Weil, Gotshal & Manges led by Keith Flaum and Jane Ross provided legal advice.

WhatsApp reportedly hired Michael Grimes of Morgan Stanley (MS) for financial advice. Andrew Luh, Sayre Stevick, Amna Latif and Derek Huoth of Fenwick & West are its legal advisers.

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