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21
feb
2014
What's Up with the WhatsApp Deal?

So Facebook is buying WhatsApp for $16,000,000,000. For anyone who can't count the zeros, that's $16 billion with a B. For those of you who don't know what WhatsApp is (and I was one of them until Wednesday), it's a text messaging application with 450,000,000 (that's 450 million) users around the world (none of whom I know) who pay little or nothing to use the service. Facebook will pay $4 billion in cash (real money where I come from) and $12 billion in Facebook stock. As if this combination weren't enough, WhatsApp's employees and founders are getting an additional $3 billion in restricted stock which vests over the next four years. $16 billion or $19 billion, what's a couple of billion among friends?

According to The New York Times, "Facebook is paying a steep price for a service that is widely used internationally but is less known in the United States. WhatsApp does not sell advertising and has very little revenue. It charges users a flat fee of $1 a year to use the service, and the first year is free." Just for clarification, that's $1, no zeros.

The Times goes on to say, "By some metrics, the cash and stock being paid for WhatsApp make it among the richest deals of all time. With 55 employees, WhatsApp is commanding a price equivalent to $344 million an employee or about $28 a user."

It's reported that Facebook's founder, Mark Zuckerberg, formally proposed the deal to WhatsApp's co-founder, Jan Koum, on February 9, at which point he left Mr. Zuckerberg to "think about it for a few days." Jan, what was there to think about? The deal was reportedly concluded by the end of last weekend. Less than 7 days and $16 billion - not bad.

Now in the interest of full disclosure, I was a Facebook stockholder. I wasn't able to buy it in the IPO, but bought it a few days later, if I remember correctly, at about $38 per share. The stock immediately sunk to the low $20 level, and I stuck with it. Toward the end of last year, the stock reached the $50 level and started trading in a range above and below the $50 mark. Being the astute trader that I am, I put in a stop loss order at $50, wanting to make sure I locked in my profit, and wouldn't you know it, the stock dipped, my sell order was executed and I had my $12 profit locked in, cash in the bank. Not a bad return in less than a year. Unless of course you see what's happened since. Warren Buffet I'm not.

Facebook's shares are trading at $68.62 as I write this, with an all-time recent high of just under $70 per share, a mere two months after my $50 sale. So either I'm the biggest idiot there is for selling too soon, or Mr. Zuckerberg is a genius for using over-valued Facebook shares to make an acquisition that's sure to take years to earn back, if ever. Clearly, on the surface the biggest winners are Mr. Koum and the other WhatsApp investors.

In any event, I think I need to figure out the economics of all this digital and social media. Or maybe, just maybe, someone wants to pay Marcum $344 million for each of our 1,300 people. I could give them each, say, $100 million, which would leave me with somewhere around $300 billion, I think. What the heck, let me give them $150 million each! Perhaps Marcum can be the accounting and finance app of Facebook? Does anyone out there have Mark Zuckerberg on speed dial?

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The opinions expressed in this column are solely those of Jeffrey M. Weiner and do not represent those of Marcum LLP, its partners or its employees.

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