NEW YORK (TheStreet) -- Facebook's (FB) decision to spend a massive $19 billion on mobile messaging specialist WhatsApp was greeted with surprise when the deal was announced late on Wednesday. The social network, however, said it sees its Silicon Valley neighbor as crucial to its long-term mobile strategy.
Speaking during an after-market conference call, Facebook CEO Mark Zuckerberg described WhatsApp as a perfect fit. "Our explicit strategy for the next several years is to focus on growing and connecting everyone in the world," he said. "We want to deliver more mobile--- this is where we see a lot more growth."
Facebook shares, which closed up 1.13% at $68.06 on Wednesday, fell on news of the acquisition. The stock was off 1.63% in premarket trading on Thursday.
The deal easily dwarfs the $1 billion Facebook paid to acquire photo sharing app Instagram in 2012, and the Menlo Park, Calif.-based firm faced questions about the $19 billion price tag during the conference call.
Responding to an analyst's question, Facebook Chief Financial Officer David Ebersman cited WhatsApp's "healthy" business. "They are on a path to get to a billion people or more in a short period of time," he said. "The service they provide is extremely useful to people."
Facebook also described the mobile messaging market as being worth $100 billion.
The WhatsApp purchase price comprises $4 billion in cash and approximately $12 billion worth of Facebook shares. The deal also includes an additional $3 billion in restricted stock units to be granted to WhatsApp's founders and employees that will vest over four years following the deal's closing.
The deal is expected to close in 2014.
Here's what Wall Street analysts are saying about the acquisition:
Sterne Agee analyst Arvind Bhatia (Buy, $70 price target)
"We think the acquisition of WhatsApp is strategically sound and will meaningfully strengthen FB's already strong mind share on mobile. While monetization will take time, we think the potential size of the user base and strong engagement on WhatsApp should ultimately lead to meaningful monetization."
"We recognize the acquisition's price tag ($19 billion) will likely cause sticker shock to investors. However, we think WhatsApp's already large user base (450M monthly active users [MAUs]), rapid growth (adding 1M users a day) and strong engagement (70% daily active users or ahead of FB's ~62%) are metrics that are hard to match. While Twitter (TWTR-$55.50-Underperform) and WhatsApp are vastly different platforms, we note that WhatsApp's user base is nearly 2x Twitter and growing at a significantly faster pace. FB believes WhatsApp is on track to reach 1B+ users (up from 450M currently) in the next couple of years. In comparison, TWTR added a mere 9M users last quarter and reached 241M users by year-end 2013. TWTR is currently valued at more than $33B."
Stifel Nicolaus analyst Jordan Rohan (Buy, $72)
"While the acquisition price seems high, and the valuation is difficult to justify for a company with immaterial revenue, platforms of WhatsApp's scale and growth have significant strategic value. In short, Facebook has with the acquisition of Instagram and WhatsApp muted the strategic risk of Google acquiring its way into social media and communications in a real way. We believe Facebook shares would have been pressured by more than single-digit percentages in after-market trading if Google had purchased WhatsApp instead."
"WhatsApp CEO Jan Koum, and Mark Zuckerberg share similar long-term strategic visions. Their appears to be a mutual respect and it is worth noting that upon the acquisition closing, Mr. Koum will be joining Facebook's relatively small Board of Directors. This is rather unusual."
Deutsche Bank analyst Ross Sandler (Buy, $75)
"Facebook's acquisition of WhatsApp solidifies its position as the top company in mobile globally (ex-China), with three leading market share apps measured by engagement - core FB, Instagram, & WhatsApp (along with FB Messenger, Paper, etc). The strategic rationale is obvious, mobile messaging apps are in a position to become 'demand generation marketplaces' as many have already demonstrated in APAC, controlling mobile engagement and the purchase funnel."
"The $19B valuation at first glance appears rich, but not if one assigns future revenue/MAU characteristics already in place for other messaging models, and given WhatsApp's arguably unmatched global scale. In summary, we view the acquisition as offensive, and FB continues to demonstrate savvy-ness beyond its years as it pivots its business model, footprint and strategy to mobile."
Evercore Capital Partners analyst Ken Sena (Downgrading shares to Equal-Weight from Overweight, $60)
"Cost of Delivering Engagement Through Acquisition Seems Excessive. FB agreed to pay ~$42 per WhatsApp user even though WhatsApp generates $0.99 per year per user (after the first year), suggesting a decades-long payback under WhatsApp's current business model, should new user growth slow. Moreover, Viber, a competitive alternative to WhatsApp with roughly two-thirds the scale and comparable growth sold to Rakuten recently for $900mm."
"Best Method of Message Monetization Still a Question. Instagram and WhatsApp are #2 & 3 behind FB in all-time social downloads, according to our analysis. However, the ad-free-nature of these experiences does provide some growth support, and as devices and individuals become ever more connected, we suspect the ability for alternatives to scale will only increase. Comments by WhatsApp CEO, Jan Koum, that advertising tends not to work as well in messaging supports this view, which we think might boil down simply to the fact that the communication is between people who already know one another."
--Written by James Rogers in New York.
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