Facebook's purchase of the messaging service WhatsApp for a cool $US16 billion ($A17.8 billion) – or $US19 billion if you include all the extra terms and conditions – has set the web ablaze about the price of tech companies.
It’s true, the overall value of big ticket tech acquisitions has grown over time. This latest deal has really raised the ceiling when it comes to future valuations. Who knows, the next big buy (possibly the picture messaging service SnapChat) could now come in over the $20 billion mark; which is funny, because Facebook reportedly offered around $3 billion for a buyout last year.
It’s no wonder why many are speculating that this latest buy is further proof of a tech company valuation bubble. WhatsApp does have a subscription revenue stream, whereby it asks its nearly 450 million users to chip in around $1 per year for its service. But this in no way justifies the estimated $42 per user price tag Facebook put on its user base. Did they account for the fact that new WhatsApp users get their first year on the service free?
And if that isn’t enough to indicate that Facebook may have lost the plot, founder Mark Zuckerberg said this to the media after the company’s Instagram deal in 2012:
"This [the Instagram deal] is an important milestone for Facebook because it's the first time we've ever acquired a product and company with so many users. We don't plan on doing many more of these, if any at all.”
Before you jump to label Facebook’s latest buy as move of a cashed-up tech company gone mad, it’s worth noting that the world has seen far bigger, riskier deals. Case in point: the AOL/Time Warner merger.
It’s a wonder when we’ll see a tech company merger that will come in over $100 billion. For now, at least, there is a lot more boom than bust in the tech sector and the growing market cap of some of the major players is set to drive the whole sector’s M&A valuations to new, record setting heights.
What do you think? Is WhatsApp overvalued? Are we entering another tech boom bubble? Let us know in the comments below.
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