Facebook Inc (NASDAQ:FB) announced last night that it will acquire the popular messaging app WhatsApp, and Wall Street wasn’t initially too thrilled with it. The big problem was the price tag: $16 billion. That’s significantly more than the $10 billion Google Inc (NASDAQ:GOOG) was said to have offered previously.

Facebook whatsapp

WhatsApp makes sense for Facebook’s strategy

The deal consisted of $4 billion in cash and $12 billion worth of Facebook Inc (NASDAQ:FB) shares, which amounts to about 182 million shares. In addition, the social network will issue $3 billion or about 46 million shares of restricted stock units to employees of WhatsApp, which will vest over the four years following the close of the sale. Nomura analysts say while at first they suffered from sticker shock over the price, they now see three big reasons Facebook could use to defend the high price it paid.

Analysts DiClemente and Ron Zember say first that buying WhatsApp just makes sense for Facebook Inc (NASDAQ:FB) because it “unquestionably strengthens” the social network’s positioning in social and mobile communication. In addition, the app enables Facebook to remain in the messaging game even for users who do not have a Facebook account because WhatsApp only requires that users have a phone number. This puts the social network more directly in competition with Apple Inc. (NASDAQ:AAPL)’s iMessage, BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s BBM and Google Inc (NASDAQ:GOOG)’s Hangouts feature.

Second, they note that the messaging app has grown very quickly, ballooning up to 450 million monthly users by adding about 1 million new users a day. And all of those users pay to subscribe to WhatsApp, which makes it different than Facebook’s monetization model, which relies on advertising.

Did Facebook overpay for WhatsApp?

Third, they said although WhatsApp’s valuation seems high on the surface, they don’t see it as unreasonable in light of other networks which have achieved scale, like Twitter Inc (NYSE:TWTR). They look at it a couple of different ways. They said Facebook Inc (NASDAQ:FB) paid about $42 per user, which is much lower than the valuation of $131 per user for Twitter Inc (NYSE:TWTR), $30 per user for Instagram back when Facebook acquired it, and $50 per user for Skype when Microsoft Corporation (NASDAQ:MSFT) acquired it.

The Nomura team also looks at the valuation in terms of potential growth. If they assume that the messaging network can hit 1 billion users who are all paying $1 per year, this would add up to $900 million in EBITDA or $19.4 billion at Facebook Inc (NASDAQ:FB)’s 2015 estimated EBITDA multiple.

Facebook estimates left unchanged

For now, they have left their estimates for Facebook Inc (NASDAQ:FB) unchanged because they are expecting “scant impact” on the social network’s revenue and expenses in the near term. The deal is expected to close sometime later this year, and at that time, we will learn more about WhatsApp’s financial situation. The Nomura team doesn’t think that the acquisition will “move the needle” much compared to Facebook’s consolidated, purchase price amortization on a GAAP basis.