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In February 2014 Facebook acquired Whats App, a free instant messaging service for smartphones for...

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Accounting

In February 2014 Facebook acquired Whats App, a free instant messaging service for smartphones for $19 billion which is by far Facebooks largest acquisition. At the time of acquisition, Whats App was a private start-up company and had $10.2 million in revenue and a negative operating cash flow of 9.9 million for the year ending December 31, 2013. Whats App has a large user base and experiences rapid growth in international messaging such as Europe, Latin America, India and other parts of Asia. Its key competitors include Line and WeChat which dominate Japan and China respectively. Facebooks user growth has been stagnating in recent years and is concentrated in the U.S. and other developed countries in Europe. By February 2016, Whats App had a user base of over one billion, making it the most popular messaging application at the time.

(1) Explain what difficulties financial analysts may face in valuing a private company like Whats App in comparison to the valuation of a publically listed company. (3 marks)

(2) Explain the important factors Facebook would have taken into account when estimating the value of Whats App to be $19 billion.

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