In a bold and aggressive move, Facebook (FB) has agreed to purchase WhatsApp, a global messaging company, for approximately $19 billion, including $4 billion in cash, 184 million shares of Facebook stock and 46 million in restricted stock for employees of WhatsApp. Based on our $45-per-share fair value estimate for Facebook, the size of the deal is roughly 13% of Facebook’s enterprise value. The deal is expected to close in late 2014.
We are sticking with our fair value estimate for Facebook, and we maintain its wide economic moat rating. Even so, we consider Facebook's shares to be overvalued, and we would suggest that investors should wait for a meaningful pullback in its stock price before allocating new capital to this name.
The deal's financial merits may eventually materialise. However, in our view, the potential synergies of this acquisition are, at best, opaque and potentially non-existent. Facebook management has highlighted its intent to maintain WhatsApp as an independent product, with a nod to its Instagram acquisition. Furthermore, in our view, Facebook is unlikely to introduce advertising into WhatsApp messages, implying no potential increase to its ad revenue, or to its monetisation capabilities.
By acquiring WhatsApp, Facebook will now be managing three separate social networks: Its eponymous Facebook platform; Instagram; and WhatsApp. While we think Instagram introduces additional scale for advertisers--which is a key component of Facebook’s economic moat, in our assessment--WhatsApp does not deliver similar benefits.
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