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The frenzy to acquire fast-growing technology start-ups reached new heights on Thursday as Facebook announced its largest acquisition ever, saying it would pay at least $16 billion for WhatsApp, a text messaging application with 450 million users around the world who pay little or no money for it.
The hefty price signals the lengths to which Facebook's co-founder & chief executive, Mark Zuckerberg, will go to protect his company's turf as the dominant social network on the web, and is sure to fuel the debate on whether consumer internet companies are overvalued.
Facebook, based in Menlo Park, California, will pay $4 billion in cash and $12 billion worth of shares for WhatsApp. But the ultimate cost of the deal could rise to $19 billion, with WhatsApp employees and founders receiving an additional $3 billion in restricted stock units, which would vest over the next four years.
By any measure, Facebook is paying a steep price for a service that is widely used internationally but is less known in the US. 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.
The purchase price dwarfs the $1 billion Facebook paid for photo-sharing service Instagram. At the time of that deal in 2012, critics assailed Facebook for overpaying, and this megadeal is sure to attract similar scrutiny. And, the price is also much higher than the $3 billion Facebook unsuccessfully offered to acquire Snapchat, another messaging service, late last year.
But Zuckerberg is clearly willing to spend big to acquire hot messaging technologies, which typically attract younger people more than Facebook does.
"Facebook is constantly working to not lose anybody," said Nate Elliott, an analyst with Forrester Research. "Sometimes that's them innovating on their own, sometimes mimicking competitors, and sometimes buying competitors."
The acquisition also reflects a new strategy at Facebook: The company intends to acquire or build a family of applications instead of simply buttressing its core social network.
Now a 10-year-old social network with 1.2 billion users globally, Facebook has become so ubiquitous in many countries that it risks losing some of the attention of users.
In buying WhatsApp, which is growing faster than its rival Twitter and other social services, Facebook gains access to customers who prefer communicating one-on-one or with very small groups rather than sharing information more widely.
Facebook also has struggled to gain traction in the message space in recent years, a big motivation for its failed offer for Snapchat. While Facebook Messenger, the company's chat platform, is popular with users, recent attempts to create its own direct messaging service have failed.
Facebook is justifying the price of this deal by citing WhatsApp's startling growth, which has been even faster than Facebook's own in its early years. On a conference call with analysts, David Ebersman, Facebook's chief financial officer, compared WhatsApp to companies with the potential to grow to one billion users.
©2014 The New York Times News Service
CLARIFICATION
The number of employees for Facebook and Twitter was erroneously interchanged in the graphic. This has been corrected. We regret the error.
The number of employees for Facebook and Twitter was erroneously interchanged in the graphic. This has been corrected. We regret the error.
