Not Much to Love with Facebook’s $19 billion Deal

FacebookIt’s been several days since Facebook (NASDAQ: $FB) announced its historic $19 billion acquisition of WhatsApp. I’ve listened to analysts and other Wall Street observers talk about how great this move was for the social media site.

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In fact, many analysts and commentators seemed to go out of their way to vouch for the Facebook CEO Mark Zuckerberg. Even more, there has been much downplaying of several issues about this deal that should give investors pause, if not just flat out make them cringe.

A Little Background (as if you haven’t heard)

WhatsApp Messenger is a cross-platform mobile messaging app that allows users to exchange text messages without having to pay for text messages. WhatsApp Messenger is available for iPhone, BlackBerry, Windows Phone, Android and Nokia.

A summary on Wikipedia gives these details:

WhatsApp handled 10 billion messages per day in August 2012. That was a surge from the two billion messages it handed in April of that year. As of November 10, 2013, WhatsApp had over 190 million monthly active users, 400 million photos are shared each day, and the messaging system handled more than 10 billion messages each day.

And back on June 12, 2013, Whatsapp tweeted: “new daily record: 10B+ msgs sent (inbound) and 17B+ msgs received (outbound) by our users = 27 Billion msgs handled in just 24 hours!”

Impressive. But how sustainable is this growth?

$19 billion Helps FB Maintain, Not Gain

If you think Facebook has solved its competition problem with its eye popping $19 billion application of WhatsApp, consider this. There is a plethora of messaging apps in the market now and they are all gaining in carving out a piece of this growing market.

In addition to WhatsApp, which touts 450 million subscribers worldwide, there is WeChat, KakaoTalk, SnapChat, Text Plus, Yahoo Messenger, Hike Messenger, NimBuzz, Line, Viber, Skype, Google, Mercury Messenger and BlackBerry – to name a few. And don’t get me started with the wireless carriers, which are also viable competitors.

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In fact, when I first heard of the Facebook/WhatsApp deal, I thought, “Why can’t I just use the text messaging service, which is free, that I have with my carrier? Why start all over building my list of contacts through sending out all of these invitations to my contacts, when they are already at my fingertips on my mobile?”

Those simple questions are on the minds of many. Pouring over the comment sections for stories written about the deal, I found dozens of comments about this. I understand that WhatsApp had been on a tear in terms of adding subscribers. I just gave a sampling above of the other services that are carving out larger pieces of the text messaging pie. There is the very real fact that WhatsApp’s growth will slow given the onslaught of other players. This must be taken into account when validating the logic of the deal.

Writing On The Wall

In a way we all should have seen this multibillion dollar acquisition coming. Facebook execs were clearly seeing that its messenger service, launched in 2011, was being loss in the fray. To squash them, slow their growth, or just remain competitive, Facebook last year rolled out another “experience.”

That’s what it calls features it rolls out. This time the experience directly related to its messenger service. The new experience allows Facebook subscribers to send text messages to non-Facebook subscribers. At the time, this feature was thought to be Facebook’s best defense against the other messenger services, including WhatsApp.

As noted by TechCrunch last year:

“messaging generates a ton of user engagement and return visits, plus also helps companies build an accurate social graph of who you talk to most. That’s important data Facebook needs to refine its News Feed relevancy algorithm and ad targeting.”

At the end of the day, Zuckerberg’s quest to connect the world cannot be separated from making money. Shareholders could care less about the intangible connection of the world quest. The tangible money in their pockets is what matters, and the road to that begins with ads.

Trust

This brings me to the black eye Facebook gets often over privacy concerns. Last year, its so-called Sponsored Stories created a huge backlash when the social media’s users learned their images and postings could be used in Facebook advertising. After settling a $20 million lawsuit over the advertising scheme, Facebook did away with it last month.

And just last month, a class action lawsuit was filed against Facebook over allegedly violating its members’ right to privacy by intercepting the private messages of subscribers without their consent.

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This mistrust of Facebook will clearly give pause to WhatsApp users who’ve gravitated to WhatsApp over Facebook largely due to worries about how Facebook uses subscribers’ data. There is a real possibility that WhatsApp being owned by Facebook will cause users to abandon WhatsApp. Investors should keep that in mind.

With All That Said…

Nobel Laureate Robert Shiller expressed my sentiments perfectly this morning on CNBC.

“I’m a big believer in looking at earnings, but I like to look at long term earnings,” he said when asked about WhatsApp. “I’m more of a stable investor who looks at long term history and wants to invest for the long term.”

Only time will tell how this historic acquisition will play out. Don’t be fooled by the over the top talk that this is the best deal ever. There is no such thing considering there is always another company that is on its way to being just as attractive and bold enough to command another historic price to be bought.

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