Coverage of Facebook’s latest acquisition

Facebook announced its biggest acquisition to date, purchasing Internet text service WhatsApp for $16 billion to $19 billion. The number depends on if you count the $3 billion in restricted stock options. Either way, it’s a vast sum of money.

Reed Albergotti, Douglas MacMillan and Evelyn M. Rusli wrote for the Wall Street Journal that the service is more popular than Twitter.

Facebook Inc. agreed to buy messaging company WhatsApp for $19 billion in cash and stock, a blockbuster transaction that dwarfs the already sky-high prices that other startups have been able to recently command.

The 55-employee company, which acts as a kind of replacement for text messaging, has seen its use more than double in the past nine months to 450 million monthly users. That makes its service more popular than Twitter Inc., the widely used microblogging service which has about 240 million users and is currently valued at about $30 billion.

 The transaction, which includes $3 billion in restricted stock units to be granted to WhatsApp’s founders and employees over four years, ranks as the largest-ever purchase of a company backed by venture capital.

Besides making its founders billionaires, the deal marks an enormous windfall for Sequoia Capital, the only venture firm that backed WhatsApp. Sequoia invested about $60 million for a stake valued at up to $3 billion in the deal, according to a person familiar with the matter.

The New York Times story by David Gelles, Brian X. Chen and Nick Bilton outlined how WhatsApp has been run and how they’ve opposed selling ads.

Mr. Koum and Brian Acton, two former Yahoo executives, founded WhatsApp in 2009.

Unlike traditional business leaders, the two founders spent most of their time throughout the day keeping the service running smoothly. Mr. Acton focused on the servers, while Mr. Koum looked at the overall product and made sure it looked and acted the same consistently across different devices.

Mr. Koum and Mr. Acton have said they want to make messaging accessible to anyone, regardless of what phone they own, where they live or how much money they make. They have also been adamant about refusing to sell advertising — they say that ads detract from intimate conversations.

WhatsApp received about $10 million in funding two years after the company was founded. It quickly became profitable.

Facebook, meanwhile, has struggled to gain traction in messaging.

Mr. Zuckeberg tried to acquire SnapChat last year for a reported $3 billion, but SnapChat turned down the offer.

While Facebook Messenger, the company’s chat platform, is popular with users, recent attempts to create its own direct messaging service have failed.

The Financial Times story by Hannah Kuchler and Tim Bradshaw pointed out that one lone backer would made billions in the deal:

The company’s sole venture capital backer, Sequoia Capital, had a stake in the “high teens” before the acquisition, which will be worth about $2.5bn to $3bn. Sequoia, a Silicon Valley-based firm, said it had invested almost $60m in the company.

Facebook is assembling a suite of apps as it seeks to dominate social networking as users move to mobile devices. The company approached Snapchat, the ephemeral messaging app last year to propose a deal, according to two people familiar with the matter. In 2012, it bought Instagram, the photo sharing app, for more than $1bn.

The company is also separating the functions on its core site into several apps, most obviously creating Facebook Messenger, in what was seen as an attempt to enter the chat app market. Facebook said the messaging app would sit alongside WhatsApp.

The Reuters story by Gerry Shih and Sarah McBride pointed out the popularity of non-social networking sites:

Combining text messaging and social networking, messaging apps provide a quick way for smartphone users to trade everything from brief texts to flirtatious pictures to YouTube clips — bypassing the need to pay wireless carriers for messaging services.

And it helps Facebook tap teens who will eschew the mainstream social networks and prefer WhatsApp and rivals such as Line and WeChat, which have exploded in size as mobile messaging takes off.

“People are calling them ‘Facebook Nevers,'” said Jeremy Liew, a partner at Lightspeed and an early investor in Snapchat.

WhatsApp is adding about a million users per day, Facebook co-founder and Chief Executive Officer Mark Zuckerberg said on his page on Wednesday.

“WhatsApp will complement our existing chat and messaging services to provide new tools for our community,” he wrote on his Facebook page. “Since WhatsApp and (Facebook) Messenger serve such different and important users, we will continue investing in both.”

Smartphone-based messaging apps are now sweeping across North America, Asia and Europe.

“Communication is the one thing that you have to use daily, and it has a strong network effect,” said Jonathan Teo, an early investor in Snapchat, another red-hot messaging company that flirted year ago with a multibillion dollar acquisition offer from Facebook.

“Facebook is more about content and has not yet fully figured out communication.”

It may not have figured out communication, but it certainly isn’t afraid of paying for what it wants. Facebook needs to find a way to capture some of the growth in mobile and with younger people who might be cooling to the site and its ads. What will be interesting is if the purchase will pay or if it will become yet another expensive toy.