In the biggest-ever purchase of a Silicon Valley-based company, Facebook on Wednesday announced it would acquire fast-growing mobile messaging service WhatsApp for $16 billion in cash and stock.

And if the founders and 53 employees of Mountain View-based WhatsApp agree to stick around for four years, they'll reap an extra $3 billion in Facebook stock. That would put the deal on par with Hewlett-Packard's epic merger with Texas-based Compaq, which was valued at $19 billion when it closed in 2002.

The breathtaking price for a5-year-old company, in a deal that came together in less than two weeks, illustrates the high stakes for Facebook and its competitors in the battle to dominate consumer technology.

"It's an alarmingly large number," said Dave Cotter, CEO of a Seattle startup called SquareHub that offers a rival social network for mobile device users. "You're talking about 16 Instagrams."

The $1 billion purchase of photo-sharing network Instagram in 2012, in fact, had been Facebook's biggest acquisition to date. Perhaps because that deal has helped drive up the social network's base of sought-after mobile users, Wall Street seemed willing to give Facebook Chief Executive Mark Zuckerberg the benefit of the doubt: While the Menlo Park-based company's stock headed south in after-hours trading once the surprise deal was announced, it did so only modestly.


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WhatsApp charges its 450 million users a $1 annual subscription for unlimited data messaging -- a far cry from the hundreds of dollars in annual fees users can rack up sending instant messages on mobile voice networks. And that user base has more than doubled since April, making it a tempting target for growth-minded Facebook as it looks to offer new, stand-alone services.

In a conference call with analysts and reporters, Zuckerberg said he had approached WhatsApp co-founder and CEO Jan Koum just 10 days earlier. "I proposed that if we joined, we could really connect the world," Zuckerberg said.

Koum was low-key in his remarks, saying the merger "will open up many new possibilities for our product and our community." But the Ukrainian immigrant and San Jose State dropout -- who met WhatsApp co-founder Brian Acton while both worked at Yahoo -- said the key to the deal was Zuckerberg's pledge of autonomy.

WhatsApp will continue to operate as a stand-alone company through an agreement similar to the one Facebook made with Instagram. There are some big differences, though: For one thing, unlike Instagram's CEO, Koum is joining Facebook's board of directors.

And while Facebook has begun making money off Instagram's 180 million users by showing them advertisements, that won't happen at WhatsApp, Koum vowed.

Officials with both companies repeatedly turned away questions Wednesday about whether other suitors bid up the price. Just last week, a rival service that boasts 300 million users, Viber, was acquired by a Japanese e-commerce company for $900 million.

But Zuckerberg called WhatsApp "the only widely used app we've ever seen that has more people using it daily than Facebook itself. They have more than 1 million new people signing up every day."

And that, he and Facebook Chief Financial Officer David Ebersman said, is why they were willing to fork over nearly 8 percent of all Facebook stock for the company -- 180 million shares. Facebook also is kicking in $4 billion cash, about a third of the total on its balance sheet.

Even if the deal falls through, Facebook is obligated to pay WhatsApp $2 billion in cash and stock.

While the price might seem eye-popping, WhatsApp's user base already is nearly double that of Twitter, whose current market capitalization tops $30 billion.

Robert Peck, a tech stock analyst with SunTrust Robinson Humphrey in New York, said he was fine with Zuckerberg's outsize purchase price.

"I think over time, they'll figure out how to monetize it, much as they did with Facebook itself," he said. "When you have that big a user base, it gives you the ability to monetize." Aside from subscriptions, he said it's possible WhatsApp could become an e-commerce tool that would allow users to buy items with their phones.

Zuckerberg said Facebook will continue to support its own Facebook Messenger app, which he sees as a different kind of product than WhatsApp -- one mostly built on reaching Facebook friends, as opposed to smartphone contacts.

In recent months, he has outlined a strategy to operate a cluster of "stand-alone" apps for users who don't want to engage on Facebook's primary site. Messaging apps, in particular, threaten to draw hundreds of millions of users away from Facebook -- especially in Asia and other overseas markets.

Zuckerberg reportedly offered $3 billion for SnapChat, a photo-based messaging application popular with younger users, who are departing Facebook's social network as their parents invade it.

"Their strategy is about having apps and services that meet the needs of people -- no matter what their age, what their interests are or how they communicate," said Debra Aho Williamson, an industry analyst with eMarketer.

The megamerger is a huge win for WhatsApp's lone venture capital backer, Sequoia Capital, which has invested about $60 million in the company since 2009, according to regulatory documents turned up by analysis firm VC Experts.

Sequoia's Jim Goetz, in a tweet, called the deal "a spectacular milestone" for Koum, Acton and their troops.

Staff writer Jeremy C. Owens contributed to this report. Contact Peter Delevett at 408-271-3638; follow him at Twitter.com/mercwiretap. Follow Brandon Bailey at Twitter.com/brandonbailey or google.com/+BrandonBaileyOnline or on Facebook at http://on.fb.me/ULIOfb.

big deals
Facebook's purchase of WhatsApp ranks among the biggest mergers in Silicon Valley history. Some of the others:
  • Silver Lake/Dell, $24.4 billion, 2013*
  • Hewlett-Packard/Compaq, $19 billion, 2002
  • Hewlett-Packard/EDS, $13.9 billion, 2008
  • Silver Lake/Seagate, $13.5 billion, 2000*
  • Google/Motorola Mobility, $12.5 billion, 2011
  • Hewlett-Packard/Autonomy, $11.1 billion, 2011

    *Menlo Park-based Silver Lake took both Dell and Seagate private; Seagate later went public again.

    The WhatsApp acquisition also is the largest ever for a venture-backed startup; the prior record was Denver-based US West's purchase of Boston's Continental Cablevision for $11.8 billion in 1996.

    Sources: Staff research; EY; PricewaterhouseCoopers; Dow Jones VentureSource; 451 Research2