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Facebook to buy WhatsApp for $19B

20 February, 2014

Facebook Inc will buy fast-growing mobile-messaging startup WhatsApp for $19 billion in cash and stock in a landmark deal that places the world’s largest social network closer to the heart of mobile communications and may bring younger users into the fold.

The transaction involves $4 billion in cash, $12 billion in stock and $3 billion in restricted stock that vests over several years. The WhatsApp deal is worth more than Facebook raised in its own IPO and underscores the social network’s determination to win the market for messaging.

Founded by a Ukrainian immigrant who dropped out of college, Jan Koum, and a Stanford alumnus, Brian Acton, WhatsApp is a Silicon Valley startup fairy tale, rocketing to 450 million users in five years and adding another million daily.

“No one in the history of the world has ever done something like this,” Facebook Chief Executive Mark Zuckerberg said on a conference call on Wednesday.

Zuckerberg, who famously closed a $1 billion deal to buy photo-sharing service Instagram over a weekend in mid-2012, revealed on Wednesday that he proposed the tie-up over dinner with CEO Koum just 10 days earlier, on the night of February 9.

WhatsApp was the leader among a wave of smartphone-based messaging apps that are now sweeping across North America, Asia and Europe. Although WhatsApp has adhered strictly to its core functionality of mimicking texting, other apps, such as Line in Japan or Tencent Holdings Ltd’s WeChat, offer games or even e-commerce on top of their popular messaging features.

The deal provides Facebook entree to new users, including teens who eschew the mainstream social networks but prefer WhatsApp and rivals, which have exploded in size as private messaging takes off.

“People are calling them ‘Facebook Nevers,’” said Jeremy Liew, a partner at Lightspeed and an early investor in Snapchat.

How the service will pay for itself is not yet clear.

Zuckerberg and Koum on the conference call did not say how the company would make money beyond a $1 annual fee, which is not charged for the first year. “The right strategy is to continue to focus on growth and product,” Zuckerberg said.

Zuckerberg and Koum said that WhatsApp will continue to operate independently, and promised to continue its policy of no advertising.

“Communication is the one thing that you have to use daily, and it has a strong network effect,” said Jonathan Teo, an early investor in Snapchat, another red-hot messaging company that flirted year ago with a multibillion dollar acquisition offer from Facebook.

“Facebook is more about content and has not yet fully figured out communication.”

Ukrainian roots shine through at WhatsApp

WhatsApp grew up in Silicon Valley, but its founder’s background in Eastern Europe gave it its DNA.

The messaging company bought by Facebook for $19 billion in a deal announced on Wednesday has become a global force, with 450 million customers who find it an easy way to send messages across borders and between different brands of mobile devices.

Founder and Chief Executive Officer Jan Koum, 37, grew up mostly in the Ukraine, and moved to Mountain View, California, as a teenager, an immigrant path reminiscent of other Silicon Valley successes such as Max Levchin, the Ukrainian-born co-founder of Paypal, and Google’s Russian-born co-founder, Sergey Brin.

Like technology titans Bill Gates and Mark Zuckerberg, Koum dropped out of college, but in his case, it was San Jose State rather than Harvard.

Koum’s eastern European background was key to WhatsApp’s creation, according to Jim Goetz, the partner at Sequoia Capital who backed the company.

Unlike companies such as Google and Facebook, which try to learn as much as possible about each user, WhatsApp does not collect personal information such as name, gender, or age, Goetz wrote in a blog post, and messages are deleted from servers once delivered.

“It’s a decidedly contrarian approach shaped by Jan’s experience growing up in a communist country with a secret police,” Goetz wrote. “Jan’s childhood made him appreciate communication that was not bugged or taped.”

Similarly, Brin’s early childhood in Russia contributed to its “Don’t Be Evil” motto.

Koum’s view was evident in a tweet he wrote last year about Iran and Turkmenistan blocking WhatsApp.

“When government gets in the way, consumers and freedom to communicate suffers,” he wrote.

He also sees advertising as an imposition.

“When advertising is involved, you the user are the product,” Koum wrote in a 2012 blog post, disparaging the effort other companies make to collect personal data. That same year, he quoted singer Kanye West in a tweet, writing, “You think you free but you a slave to the funds, baby.”

WhatsApp charges 99 cents a year, and that bargain-basement approach extends to the WhatsApp’s original office, according to Yoav Leitersdorf of YL Ventures, who visited in 2010 in an attempt to invest in the young company. He’s still impressed by both the founders and what he saw.

“It was like a car dealership with no cars inside and hardly any furniture at all for that matter,” Leitersdorf recalled. “I remember parking my car and walking around the building for about five minutes or more, looking for the office door.” The office contained a handful of desks atop a stained wall-to-wall carpet, he said.

At the time, Koum mentioned that many of the engineers worked remotely; today he provides recommendations for some on his LinkedIn page.

Last month, as the crisis in his home country of Ukraine escalated, Koum posted photos of revolutionaries and tweeted “praying for peace and quick resolution to the crisis #ukraine #freedom.”

He also has given a shout-out or two to his adopted country. “WhatsApp Messenger,” he tweeted last year. “Made in USA. Land of the free and the home of the brave.”


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Facebook to buy WhatsApp for $19B

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