February 25th, 2014
by Garrett Baldwin, Money Morning
Many tech companies are sitting on a ton of cash these days, but not Facebook Inc. (Nasdaq: FB). Its $19 billion acquisition of WhatsApp proves FB wants to put its cash to work.
Apple Inc. (Nasdaq: AAPL) has $141 billion in net cash on hand. Google Inc. (Nasdaq: GOOG) has a little more than $58 billion. There are hundreds of billions of dollars sitting offshore among tech and media companies. Investors have called for firms to buy back stock, hike dividends, or consider using that cash to grow through acquisitions.
But buy-side activity in the tech sector has been relatively tame in recent months.
Before buying WhatsApp, Facebook attempted to purchase SnapChat at the end of 2013 for $3 billion in cash. After they were turned down, the company began diligence on other potential acquisitions.
With the $19 billion acquisition of social-messaging application WhatsApp, the company made a bold move outbidding Google's $10 billion offer.
But Facebook did more than just pull the rug out from under its rival's growth strategy.
It cemented itself as the global leader in mobile media by using a very unique acquisition strategy.
For Facebook (Nasdaq: FB) Time Equals Money
Forget what you're reading in the headlines.
Sure, Facebook paid a meager $42 per WhatsApp user. This is in stark contrast to the average user-to-market cap cost of Twitter ($150), Facebook ($140), and LinkedIn ($120). But this number doesn't matter. It's little more than a PR talking point for people who know little about the real metrics of the marketing and media world.
Average-user cost doesn't tell us anything about long-term profitability. A free phone application with 450 million users that bumps to $0.99 per year isn't the sign that Facebook paid good money for "guaranteed consumers."
We need to dig deeper.
There are two reasons this acquisition works.
The first is obvious. WhatsApp is the company that had the potential to not just beat Facebook at the mobile game, it could have become the real Facebook killer. With its one-to-one sharing of photos, videos, and content, WhatsApp is everything that Facebook wants and needs to be as customers transition from desktops to mobile devices.
Functionally, WhatsApp was a profile and feed page away from becoming a simpler, mobile version of Facebook... without the clunky advertising.
Facebook has tried to build services for mobile. It tried a camera app and an app store, but the company succeeds in its current form. Grabbing WhatsApp provides Facebook with the functionality it seeks and knocks out the "Facebook Killer."
But Facebook isn't just thinking of integration. It's also building its business around a media metric that few people understand.
With this acquisition, Facebook now dominates the global market when we calculate the amount of time spent by individual consumers on their cell phones. Between the Facebook homepage, Instagram, and WhatsApp, the company now has three of the top five applications by consumer time spent per day.
By June, those three apps could be the top three overall given that WhatsApp is adding 1 million users per month.
Facebook isn't just "buying customers" on the cheap. It's purchasing the significant amount of time that consumers spend on these applications. According to Medium.com, Facebook purchased 117 billion minutes per month that it considered "lost" to WhatsApp.
That calculates to 12.4 minutes per user, each day.
WhatsApp's 450 million customers are active and span the globe. The app is immensely popular in South America, Europe, India, and Latin America - places where Facebook has been diligently trying to expand on its own in recent years. More than 70% of WhatsApp users are active on the app every day.
Facebook, which has the most activity of any mobile service, has a comparative active rate of 62%. And in certain countries like Brazil, Mexico, and Spain (places where Facebook is trying to gain a foothold), users are spending as much as 25% of their cell phone time on WhatsApp.
With WhatsApp in tow, Facebook is migrating quickly from desktops to mobile devices.
That migration bodes well for Facebook stock, according to Money Morning's Capital Wave Strategist Shah Gilani.
"The addition of WhatsApp - while perhaps not transformational - will certainly serve as a catalyst for Facebook's next phase of growth".
Now, the challenge is to monetize these applications. They're positioned to do so, but they'll need to act fast and innovate. That will be the challenge moving forward.
But at least the acquisition is forward thinking.
NOTE: What do you think of Facebook's acquisition of WhatsApp? Is this a smart move for the social media giant? Join the conversation on Twitter @moneymorning using #Facebook.