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Is Facebook crazy?

| Sunday, February 23, 2014

Somehow, the biggest headline on news sites nationwide and on my Facebook news feed this week wasn’t how Russia’s Adelina Sotnikova pulled a controversial win over South Korea’s Yuna Kim or the protests in Kiev.

It was Facebook’s $19 billion acquisition of the cross-platform messaging service Whatsapp.

Facebook isn’t new to the big tech acquisition arena. Just a year and a half ago, Facebook announced its acquisition of the popular photo-sharing app Instagram for a cool $1 billion. Unprecedented at the time, some people saw the acquisition as a huge mistake, as Instagram had no revenue and no clear path to make money. But whether or not it was a smart move, it was clearly a trend-setting one, setting the stage for many large tech acquisitions to come.

Since then, Yahoo! purchased Tumblr for $1.1 billion, Microsoft bought Nokia’s mobile phone business for $7.2 billion and Google closed a deal for cellphone maker Motorola Mobility for $12.5 billion, subsequently selling it off again to Lenovo for $2.91 billion. All of these pale in comparison to Facebook’s acquisition of Whatsapp, which comes in at $12 billion of stock, $4 billion of cash and another $3 billion in stock that will vest over the next four years.

Nobody really knows what Facebook’s plan will be. All it has said is it will let Whatsapp and its 50 employees continue to operate independently.

Is Facebook crazy? Maybe, maybe not. Isn’t Whatsapp just a simple app that sends short blurbs of text and photos back and forth, not unlike Facebook’s own Messenger?

Perhaps it wants Whatsapp’s 450 million monthly active users. Looking at that, it’s perhaps not a terrible decision on a per user basis. According to CNN’s Michael Wolf, it equates to $42 per user. In comparison, Instagram’s acquisition cost $28 per user while Tumblr’s cost $33 per user.

But this sounds an awful lot like tech valuations before the dot-com bubble collapsed 14 years ago. Back then, tech companies were valued by the “eyeball” — how many people visited the site. Using “active monthly users” is just a slightly modified metric that accomplishes the same goal. None of this really addresses typical valuation methods that people learn in Finance 101.

Will company valuations continue to soar? Nobody knows. Tech companies like Twitter and LinkedIn are offering IPOs left and right, and Alibaba’s upcoming IPO is widely expected to be well over $150 billion. Traditional companies, and even The Observer, are beginning to invest heavily in their online presence.

Whether Whatsapp ever delivers $19 billion of value to Facebook is a question that may never be answered fully. But it’s the question that every tech company is asking as they look at the field of burgeoning startups.

The views expressed in this column are those of the author and not necessarily those of The Observer.

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About Kevin Song

Kevin Song is a finance and computer applications major in the Class of 2015. He enjoys playing with the latest gadgets and technology. At The Observer, he led the 2014 website redesign. He serves as the Online Editor and Associate Photo Editor in 2013-2014 and Assistant Managing Editor in 2014-2015.

Contact Kevin