In February, the news that Facebook would pay an astounding $19 billion to acquire text-messaging start-up WhatsApp caused jaws to drop across the tech world and beyond. The agreement, the fifth-largest technology deal ever, offers interesting lessons to guide business negotiators through their most important deals.
Texts and chats
In 2009, Jan Koum, a Ukrainian immigrant, and his friend Brian Acton launched WhatsApp with the goal of creating a text-messaging application that would connect users with family and friends abroad at a low cost. Since its inception, WhatsApp has been ad-free. It now has 450 million global users who pay a 99-cent annual fee for the service.
In 2012, Facebook founder and CEO Mark Zuckerberg approached Koum about the possibility of acquiring his business. Concerned about Facebook’s pervasive use of ads and maintaining his company’s independence, Koum showed little interest. Nonetheless, a friendship developed between the two men over the course of hikes and dinners. “As we got to know each other, we got to respect each other more,” Koum told the Wall Street Journal.
Offers, odd and appealing
Facebook wasn’t the only high-tech company courting WhatsApp. In 2013, Google made an “odd” proposal to WhatsApp, according to Internet news website The Information: It offered millions for the right to be notified if the messaging app entered into acquisition talks with other companies. The unusual “right to know” offer reportedly was hatched by Google mergers-and-acquistions chief Don Harrison after the company was burned by Facebook’s $1 billion purchase of Instagram in 2012. WhatsApp wisely rejected the offer, perhaps anticipating that Facebook would have lost interest if it welcomed Google to the competition.
Early this past February, WhatsApp received its official offer from Zuckerberg. Framing it as a partnership, Zuckerberg affirmed that Facebook would not try to force ads on WhatsApp or otherwise complicate the app, according to Koum.
Around this time, according to The Information, Google entered the race, going so far as to notify Sequoia Capital, WhatsApp’s venture-capital investor, that it was prepared to outbid Facebook no matter what the cost. But WhatsApp refused to engage with Google, reportedly viewing Facebook as a better match and suspecting that Google was interested primarily in thwarting its competitor.
Zuckerberg and Koum mapped out an arrangement in which WhatsApp would operate separately from the social-media behemoth. At Zuckerberg’s insistence, Koum also agreed to accept a seat on Facebook’s board of directors. The $19 billion deal was struck. In an interview with the Wall Street Journal, Koum focused on his and Zuckerberg’s common goals rather than on their differences: “We have a shared mission of connecting the world and making it more open.”
A new bubble?
Did Facebook overpay for WhatsApp? The deal could pay off if the app meets its goal of one billion users. And the acquisition will give Facebook the stronger presence it has been seeking on mobile devices.
Moreover, the prospect of losing to a competitor can be a legitimate reason to overpay for a commodity, according to Harvard Business School and Harvard Law School professor Guhan Subramanian. In so-called all-pay auctions, each bidder believes it will suffer in the marketplace if a competitor gets the target company. In the end, the winning bidder (here, Facebook) overpays but perhaps suffers less than the losing bidder (Google). Viewed in this light, Facebook’s possible overpayment is rational rather than a sign of competitive arousal—the type of “auction fever” that leads bidders to try to win at any cost.
Meanwhile, across Silicon Valley, both hopes and fears that the deal would spark a new wave of exorbitant start-up acquisitions abounded. Concern is growing that the WhatsApp purchase marks the start of a high-tech bubble like the one that burst at the turn of this century.
Stand-out negotiating moves in the WhatsApp purchase:
A strong relationship. Zuckerberg won Koum over by patiently pursuing his friendship and trust. Ultimately, Koum came to view their differences as compatible rather than insurmountable, and their close ties should serve them well when problems inevitably arise in their partnership.
A calculated overpayment. Often, the winner of an auction or other intensely competitive negotiation relishes only a short-term victory, as there is a good chance it overpaid for the prize. Sometimes the best way to avoid overpaying in an auction is to stay out of it entirely. But when your analysis suggests that you would suffer if a competitor won the prize, overpayment may be a rational move.
Innovative thinking. Though the strategy didn’t work this time, Google’s Don Harrison came up with a novel negotiating strategy—the “right to know” offer—that others may adopt more successfully in the future. The strategy could help organizations stay informed about potentially beneficial opportunities and also scare off competitors.