Why did Facebook buy WhatsApp? Mergers & Acquisitions Part II

This is the second part of the post about Mergers and Acquisitions (you can read the first part here)

What is WhatsApp?

WhatsApp is a multi-platform instant messaging service with around 450 million users. Users can send videos, messages and pictures to each other regardless of phone model or network carrier. It was founded in 2009 by Brian Acton and Jan Koum, and had an estimated turnover of $20 million in 2013. Facebook, by contrast has  over  1.23 billion users according to Time,  and reported $523 million profits last year. In February 2014, Facebook purchased WhatsApp for $16+ bn.

Credit

Why did Facebook buy WhatsApp? – Mergers & Acquisitions Part I

Recently I had a video interview (a very interesting experience) where I was asked a question to the effect of

“Facebook recently bought Whatsapp for $16bn, why pay so much for such a small company?”

I thought this question would be a good starting point for looking at mergers and acquisitions – what they are, how they work, and why companies do them.