The irrational rationality behind Facebook’s $16 billion acquisition of WhatsApp

Another day and another acquisition — and another one that is jaw dropping and seemingly insane.

Less than a week after Japan’s Rakuten acquired Viber for $900 million, Facebook co-founder and chief executive Mark Zuckerberg announced that he is buying WhatsApp for a whopping $16 billion in cash and stock. Add another $3 billion for WhatsApp employees may get over next few years in restricted stock, and this becomes a $19 billion company.

When I think about the deal, it actually makes what investor Paul Kedrosky calls “ridiculously rational” sense. It keeps WhatsApp out of the hands of Google and most importantly takes out an aggressive competitor for “attention” from the market.

Facebook is going to end up competing with apps like Line and WeChat in many markets for the consumer’s mobile minutes and WhatsApp gives the Menlo Park based company a strong competitive weapon. While potential monetization remains a bit of a head scratcher, there are more options for the company to think about, like new native advertisements in the near future. WhatsApp as an app store is not out of the realm; I said so as part of a roundtable hosted by Bloomberg West’s Emily Chang.

Images courtesy from Facebook messenger (L) and WhatsApp (R).
Images courtesy from Facebook messenger (L) and Whatsapp (R).

The deal makes (weird) sense especially if you view it from a historical lens. There are three such deals that have occurred in the past: Microsoft bought Hotmail in 1997 for $400 million and the reaction was, are they crazy? It allowed Microsoft to get to webscale really fast at a time when email was important as synchronous communication is today. It would be safe to say Microsoft did fine on that acquisition.

AOL, or America Online as it was known as then, acquired ICQ, another fast growing instant messaging network, for $400 million. Aol had its own IM network and whether it was hubris or corporate politics, it ruined ICQ and limited its own potential to control the IM market. Microsoft used the Hotmail community to jump start its IM efforts.

Another company that acquired a fast-growing communications platform was eBay, which bought Skype. There was no synergy in that deal and it wasn’t a surprise that it failed. Skype is now a part of Microsoft. Microsoft bought Skype in 2011 for a whopping $8.5 billion but has managed to muck up the deal.

Skype was ahead of the curve in terms of synchronous communications — textual and visual. A residency at Microsoft has been its undoing.

Now compare these with WhatsApp and Facebook. Both companies are in the same business — connecting people through communication. But their methods of communication — or modalities of communication — are different. WhatsApp is synchronous and has a different kind of immediacy, while Facebook’s atomic unit of communication is personal status updates with the intention of interacting with people you already know.

Facebook has had a tough time trying to invent new native behaviors, mostly because it has a powerful basic unit of communication and interaction. WhatsApp brings some unique capabilities, much like Instagram, which brought a different set of interaction attributes.

Over next few days you are going to hear that this deal is bad for Snapchat or Twitter and it is simply not true. They have different communication behaviors attached to them and Facebook and WhatsApp are not those applications.

Another bit of historical perspective — Cisco used to make aggressive acquisitions using its inflated stock market capitalization in order to stave off competitors who threatened its core business and move into parallel markets. Zuckerberg, too, is an aggressive CEO who knows that falling prey to “not invented here” philosophy is sure way to fall behind.

Most importantly — he knows if an app or service can get to a billion users, then it can do what he fears the most — take attention away from Facebook.