Facebook to Buy Messaging App WhatsApp for $19 Billion

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gsr-786Facebook Inc. (FB), the world’s largest social network, agreed to acquire mobile-messaging startup WhatsApp Inc. for as much as $19 billion in cash and stock, seeking to expand its reach among users on mobile devices.

The purchase would be the biggest Internet deal since Time Warner’s $124 billion merger with AOL in 2001, according to data compiled by Bloomberg. The accord includes $12 billion in stock, $4 billion in cash and $3 billion in restricted shares, Facebook said today in a statement. WhatsApp has more than 450 million members, with 1 million users being added daily, Facebook said.

Facebook, which acquired photo-sharing service Instagram for about $700 million in 2012, is counting on applications beyond its main social network, such as messaging and news, to court more users on smartphones and tablets. WhatsApp competes with Snapchat Inc., which rebuffed a $3 billion offer from Facebook last year, as well as services from Twitter Inc. and Kik Interactive Inc.

“They seem to have made a pretty strong statement with this acquisition — that they are willing to broaden their portfolio of apps and not just put all of their eggs in one basket,” said Debra Aho Williamson, an analyst at EMarketer Inc. “Facebook has come to the realization that it needs a portfolio of apps to reach people with different use cases, different demographics, or different ways of communicating.”

Largest Deal

The deal is the largest ever for Menlo Park, California-based Facebook, and prices WhatsApp at more than half of Twitter’s market value. Facebook shares fell as much as 5.7 percent to $64.18 in extended trading after the acquisition was announced. They rose 1.1 percent to $68.06 at the close in New York.

“Facebook is clearly taking out one of its main competitors,” Paul Sweeney, a Bloomberg Industries analyst, said in an e-mail. “They are buying 450 million loyal users and an extraordinary growth story, but at a staggering cost.”

Mountain View, California-based WhatsApp, which is popular inEurope, lets users send messages through its service on mobile devices based on different operating systems including Apple Inc.’s iOS, Google Inc.’s Android, Microsoft Corp.’s Windows Phone and BlackBerry Ltd.’s software.

Unlike traditional text messages, which consumers pay for through their mobile-phone plans, WhatsApp is free for the first year, and then costs 99 cents a year after that. It also competes with Tencent Holdings Ltd.’s WeChat in China, KakaoTalk in Korea and Line in Japan, as well as Facebook’s own application, Facebook Messenger.

‘Primary Threat’

“They just took out their primary threat and they recognize that overnight it makes them the leader in the mobile messaging space,” said Jim Patterson, CEO of San Francisco-based Cotap Inc., a messaging service for businesses. “It was clearly the first mobile app other than Facebook that was going to get to 1 billion users.”

Jan Koum, WhatsApp’s CEO, co-founded the company with Brian Acton in 2009 after almost a decade as an engineer at Yahoo! Inc. Venture capital firm Sequoia Capital invested $8 million in WhatsApp in 2011.

While Facebook has touted its progress adding more advertising revenue on mobile devices, Koum has been strict about keeping ads out of WhatsApp’s messaging service.

Koum said in a statement today on the company’s website that WhatsApp will remain autonomous and operate independently.

“There would have been no partnership between our two companies if we had to compromise on the core principles that will always define our company, our vision and our product,” he said.

Valentine’s Day

Zuckerberg first reached out to Koum in the spring of 2012, when the two met for coffee at a German bakery inLos Altos, California, and ended up talking for more than two hours, according to a person with knowledge of the matter. They have since met frequently, going to dinner and on hikes, said the person, who asked not to be named because the process isn’t being discussed publicly.

Koum went to Zuckerberg’s house in Palo Alto for dinner on Feb. 9, and the conversation became more serious. The two talked about how they could work together more closely on Zuckerberg’s Internet.org initiative for connecting the world on mobile devices, and the conversation evolved into acquisition talks in the next 10 days, with Zuckerberg suggesting Koum join Facebook’s board. On Valentine’s Day, Koum came by Zuckerberg’s house with chocolate-covered strawberries that the two shared as they hammered out pricing points, the person said.

Facebook was advised by Allen & Co. and Weil, Gotshal & Manges LLP, and WhatsApp was advised by Morgan Stanley and Fenwick & West LLP.