William Blair analysts Ralph Schackart, Ryan Domyancic and Andrew McDonald rate Facebook Inc (NASDAQ:FB) as an Outperform as the social networking giant announces an agreement to acquire Whatsapp.

FB Facebook WhatsApp

WhatsApp acquisition overview

After the markets closed on Wednesday, February 19, Facebook Inc (NASDAQ:FB) announced that it entered an agreement to acquire WhatsApp, a leading mobile messaging application. The total transaction size is about $16 billion, composed of about $12 billion of stock (184 million shares) and $4 billion of cash. In addition, 46 million RSUs (about $3 billion) will be issued to the employees of WhatsApp that will vest over four years.

WhatsApp has garnered over 450 million monthly active users globally with 70% active on any given day, higher than the 62% engagement rate Facebook Inc (NASDAQ:FB) reported last quarter. It facilitates more than 19 billion sent messages and 34 billion received messages daily (a single message can be sent to multiple people), which, according to Facebook Inc (NASDAQ:FB), is similar to the size of the entire global SMS market. WhatsApp’s capabilities go well beyond text messages, with more than 600 million photos uploaded per day and more than 200 million voice messages and 100 million video messages sent per day.

WhatsApp employs a subscription-based model in some regions (reportedly around $1.00 annually) but is primarily focused on growing users. Facebook did not disclose how much revenue WhatsApp generates. In our view, if and when Facebook Inc (NASDAQ:FB) focuses on monetizing WhatsApp, it will likely be through a subscription fee rather than through advertisements. The deal is subject to regulatory approval and expected to close in 2014. At this time, we are not updating our Facebook estimates to reflect incremental revenue or dilution as a result of the WhatsApp acquisition.

Thoughts on the acquisition

As highlighted below, we believe the acquisition makes strategic sense for Facebook Inc (NASDAQ:FB) as WhatsApp expands Facebook’s reach, from both a user and product perspective, into a growing global mobile ecosystem. While the strategic rationale makes sense, it is difficult to determine if the valuation is compelling. We note that on an enterprise-value-to-subscriber basis, Facebook will pay about $36 per monthly active user, in line with the $33 per monthly active user it paid when it acquired Instagram, and below the Internet average enterprise-value-to-user/KPI ratio of $109.

Facebook Inc (FB) to gain a massive mobile network

With the acquisition, Facebook Inc (NASDAQ:FB) will have a massive and engaged mobile user base between its core product (Facebook.com and the Facebook app), Instagram, and WhatsApp. We note that Facebook did not speculate on the user overlap between itself and WhatsApp.

Grows data set and enhances mobile targeting capabilities

By adding WhatsApp to its mobile ecosystem, Facebook Inc (NASDAQ:FB) will have yet another access point into the mobile daily habits of consumers to which it sells advertisements. Facebook could combine the data it collects from WhatsApp with its already large data set to improve its mobile user identification and targeting capabilities.

Decentralizing the “Facebook Inc (FB)” experience

Facebook CEO and founder Mark Zuckerberg noted that WhatsApp will continue to run as an independent company. We are seeing a pattern by Facebook of decentralizing the “Facebook” experience across multiple stand-alone applications: Facebook Inc (NASDAQ:FB) (its core social networking product), Instagram, Facebook Messenger, Paper, Facebook Poke, and now WhatsApp. While we assume Facebook Inc (NASDAQ:FB) can easily synchronize the data it collects from these different applications on the back end, monetizing multiple applications is likely more difficult than monetizing a single application.

Facebook Inc (FB)’s purchase price of Wahtsapp

It is difficult to immediately discern whether $16 billion (plus an additional $3 billion in unvested RSUs) was an appropriate purchase price for WhatsApp. While time will ultimately tell, a $16 billion purchase price values a monthly active WhatsApp user at $36, which is comparable with other Internet models, as shown in exhibit 1.

Facebook enterprise value