WhatsApp, founded in 2009 by former Yahoo engineers Jan Koum and Brian Acton, is the most popular of a set of mobile messaging apps that some argued posed a threat to Facebook's business. The app served as an alternative to SMS by letting users send messages for free across smartphone platforms. It currently has more than 450 million people who use the app every day.
"WhatsApp is on a path to connect 1 billion people. The services that reach that milestone are all incredibly valuable," Mark Zuckerberg, Facebook's cofounder and CEO, said in a statement. "I've known Jan for a long time and I'm excited to partner with him and his team to make the world more open and connected."
On an investor call that followed the announcement, Zuckerberg added: "The growth rate they have today and the monetization that's early but promising and in place, we see a clear trajectory ahead and are excited to work together on this."
Unlike Facebook, WhatsApp does not make money through ads. Instead, WhatsApp is free to use for the first year and then charges $0.99 a year for a subscription after that. The founders have been firm on not wanting to introduce advertising, a point that was re-iterated by Zuckerberg and Koum on the call.
"We think that for our product, advertising is not necessarily the right way to go," Koum said. "We think we have a very solid monetization system in place."
If the deal doesn't go through, Facebook will pay a breakup fee of $1 billion to WhatsApp, which is still more than the total amount Facebook ended up paying to acquire Instagram.
Facebook stock declined by more than 4.5% in after hours trading following the announcement.
"If you look at it from the standpoint of [WhatsApp's] user base today and the fact that it doesn't really monetize, then it looks very expensive," says Arvind Bhatia, an analyst with Sterne Agee. But he argues the deal makes more sense in the long-term. "It's truly one of those where [Facebook] is trying to ensure that where the user base is headed, it stays within the Facebook family."
While the price tag is high, Bhatia argues that Facebook was "smart" to pay for the vast majority of the acquisition in stocks, at a time when Facebook stock is trading at an all-time high.
Koum, the cofounder and CEO, had repeatedly denied that the company was looking to be acquired. Then again, it's not everyday you get offered $16 billion.
The New York Times reports that Zuckerberg and Koum had been in talks on-and-off for two years. On February 9 of this year, Zuckerberg invited Koum to dinner at his home in Palo Alto, where he proposed to buy WhatsApp. Koum later returned to Zuckerberg's home on Valentine's Day to talk through the details of the deal. The WhatsApp founder also reportedly ate "a plate of chocolate covered strawberries intended for" Zuckerberg's wife, Priscilla.
Zuckerberg and Koum nailed down the deal last weekend. As part of the acquisition, Koum will join Facebook's board of directors.
WhatsApp will continue to operate independently, which Zuckerberg compared to the way it handled the acquisition of Instagram.
The deal has been approved by the boards of both companies and is subject to regulatory approval. Facebook expects the deal to close later this year.
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