Strategic Management
Case Analysis
On
$19B 4 txt app WhatsApp…omg!
Submission by,
Group 6
Aditya Singh | BJ22110
Deepali Agarwal | BJ22119
Harshal Rumale | BJ22123
Rashi Aggarwal | BJ22142
Shivani Vinod Kumar Singh | BJ22151
Subham Jyoti Mishra | BD22112
Adarsh Singh | BJ22109
1. Do you think that Facebook’s purchase of WhatsApp for $22 Billion is either:
a. The most outrageous waste of shareholder funds or
b. The deal of the century? Explain your reasons.
Before answering the question, we need to look at some of the key issues faced by Facebook in
2013:
1. Slowing growth and user engagement rate.
2. Changing teens’ habits was critical for social messaging platforms like Facebook.
3. Growth in MAUs in developed countries was stalled.
4. Shifting focus on mobile-based applications.
5. Privacy concerns were pertinent with Facebook.
6. Market was becoming more and more competitive.
The acquisition allowed Facebook to diversify its portfolio by entering the popular messaging
market, which was growing at a significant rate and was posing a threat to Facebook's
dominance in the social networking space.
Under the diversification strategy, we need to check the following criteria:
1. Attractiveness Test: The industry is attractive owing to the increasing mobile phone and
internet penetration and the affinity of teenagers towards social media instant messaging
platforms.
2. Cost of entry Test: Based on the future ten years’ cash flows as per estimation, using the
FCFF method, the NPV of the firm is estimated to be roughly $32.38 billion i in 2014. Thus, the
cost of $22 billion is a good deal.
3. Better off Test: Both the units seem to be gaining a competitive advantage from the linkage.
WhatsApp's 600 million monthly active users provided Facebook with a massive user base to
leverage. Thereby driving users to each other (cross-selling) and increasing the overall time
spent on both apps.
Keeping WhatsApp independent allows its founders to focus on product development and user
growth, leading to major potential payouts for Facebook in the long run. The fact that the
acquisition of Instagram was successful from a growth point of view and they were able to
operate the platform independently gives assurance that WhatsApp will also receive similar
treatment.
Advantages:
Diversification of Facebook's portfolio into a messaging platform
Access to a massive user base and high user engagement
Ability to keep WhatsApp independent, leading to product development and user growth
Leveraging strong security features of WhatsApp in reviving the image of Facebook
Risks:
Difficulty in monetizing the acquisition in the short term
Intense competition from other messaging apps
Risk of losing users due to privacy concerns
Changing user preferences toward different modes of communication
From Porter's Five Forces analysis, WhatsApp was a direct threat to Facebook's core
business. By acquiring WhatsApp, Facebook eliminated a major competitor and gained access
to a massive user base of over 600 million users. This helped Facebook diversify its portfolio
and move into a popular new segment of social networking.
From a resource-based view, WhatsApp's team and technology were valuable resources that
Facebook could leverage to enhance its own messaging services. Additionally, by keeping
WhatsApp independent, its founders were able to focus on product development and user
growth, which eventually would lead to major payouts for Facebook.
Overall, it can be argued that Facebook's purchase of WhatsApp was a temporary pain for the
shareholders from a financial perspective but was the deal of the century from a strategic
perspective, as it helped Facebook eliminate a major competitor, gain access to a massive user
base, and diversify its portfolio. While there were concerns about Facebook's ability to monetize
WhatsApp and its potential impact on user privacy, the acquisition aligned with Facebook's
long-term vision and strategic goals.
2. If it was up to you, how would you monetize WhatsApp? Note: Present one specific
option (in brief) which is different from what Facebook/Meta is currently (as of 2023)
doing.
WhatsApp could be monetized in the following ways:
In-App Purchases: One possible way to monetize WhatsApp could be through in-app
purchases. WhatsApp could offer users the ability to purchase additional features, such as voice
and video calls, stickers, and other digital goods.
This model has been successful for other messaging platforms like LINE, which offers a range
of stickers and other virtual goods for purchase within its app. Another example is WeChat,
which has a virtual storefront that allows users to purchase a wide variety of products and
services, from food delivery to movie tickets.
Business Accounts: WhatsApp could have introduced paid business accounts for small and
medium-sized enterprises (SMEs) to interact with their customers. This model has already been
incorporated by other messaging apps like Viber, which offers Viber Business accounts.
Subscription-based Model: WhatsApp could have also followed a subscription-based model,
where users would pay for premium features such as animated stickers/emojis, custom avatars,
themes and backgrounds, larger file size while sharing, enhanced security features (remotely
wipe chats, password-protected messages, or secure cloud backups), etc.
The subscription plans can be different as per user needs and willingness to pay. Economic
plans will provide simpler features, while high-end plans will provide extensive features.
The subscription-based model is something WhatsApp has not yet incorporated, and this is
quite successful in platforms such as Discord and Telegram.
iValuation of the firm from the cash flows estimated
Assumptions: Marginal corporate tax: 40%, Growth rate for perpetuity: 2%
Appendix:
WACC 10% 1 2 3 4 5 6 7
(in $ millions) 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 3.8 10.2 144.0 344.0 685.0 1181.0 1846.0 2513.0 3072.0
EBITDA 72.0 223.0 548.0 945.0 1477.0 2011.0 2457.0
NOPAT 43.2 133.8 328.8 567.0 886.2 1206.6 1474.2
Capex 0.1 0.2 3.4 8.2 16.2 28.0 43.8 59.6 72.8
NWC 2.9 21.8 30.1 41.2 56.3 76.3 102.8 137.2 181.2
WC change 18.9 8.2 11.2 15.0 20.1 26.5 34.4 44.0
FCFF 31.5 114.5 297.5 519.0 816.0 1112.6 1357.4
PV 28.7 94.6 223.5 354.5 506.7 628.0 696.5
Growth 2%
Terminal Value 27471.0 402.1 1459.5 3793.5 6616.7 10404.0 14185.8 17306.4
PV sum 4913.2
Total 32384.2
References:
(1) Facebook acquisition of WhatsApp (case study) - LinkedIn. https://www.linkedin.com/pulse/facebook-
acquisition-whatsapp-case-study-peter-kovac Accessed 2/23/2023.
(2) Analysis of Facebook's Acquisition of Whatsapp - EduPristine.
https://www.edupristine.com/blog/facebook-acquisition-whatsapp Accessed 2/23/2023.
(3) Facebook (FB) Plans to Turn Messaging App WhatsApp Into a Moneymaking ....
https://www.bloomberg.com/news/features/2020-12-09/facebook-fb-plans-to-turn-messaging-app-
whatsapp-into-a-moneymaking-business Accessed 2/23/2023.
(4) WhatsApp: The Best Meta Purchase Ever? - Investopedia.
https://www.investopedia.com/articles/investing/032515/whatsapp-best-facebook-purchase-ever.asp
Accessed 2/23/2023.
(5) Facebook to Acquire WhatsApp | Meta.
https://bing.com/search?q=Facebook+acquisition+of+WhatsApp+strategy Accessed 2/23/2023.
(6) 8.4 Diversification Strategies – Mastering Strategic Management.
https://open.lib.umn.edu/strategicmanagement/chapter/8-4-diversification-strategies/ Accessed
2/23/2023.
