The deal size is extraordinary.  At today’s exchange rate, Facebook’s $19Bn could have bought out Land Securities in its entirety and still be sitting on almost £3Bn of change – or the whole of M&S and retained another £370M.

What’s Facebook really acquiring?  By all accounts, Whatsapp’s offer isn’t unique.  I’ve seen mention of WeChat, Viber, Wassup and Tango, all of which – so I read – provide something very similar to Whatsapp, and all of which have a user-base.  Not only do they all offer something similar, they’re all free to the end user.  So it’s not Whatsapp’s unique offering that values it at $380M per employee.

Is it the fact Whatsapp appears to have 450 million users?  Or is it the age profile of the user base?

Some years back, we undertook due diligence for the US acquirer of a UK web-based business.  In Facebook terms, it was a miniscule deal – but the price being offered still struck me as staggeringly large for the target business.  I raised this with the guy heading up the acquisition.  His response  – “True, they’ve not got the best technology, but they’ve got traffic.  We can buy better technology, or write it ourselves, but what we can’t do is grab their traffic.  And whilst their traffic isn’t worth what we’re paying, this isn’t our only acquisition.  We’re buying up everyone in the space.  We’ll control it all.”  And he went on to point out the purity of the business model – a technology platform capable of limitless expansion with almost no human interference, where the customers did all the work and paid a small annual fee  for the privilege – “A cash cow. Our only problem is how to spend it.”

I can see two fundamental differences between that scenario and the Facebook / Whatsapp deal.  In the deal we worked on, the target had (still has) a proven revenue stream, and the acquirer did indeed end up controlling the space.  Facebook needs to find a way to generate revenues from an app that doesn’t, and it cannot hope to control the space.

So what’s the underlying logic behind the deal?  I think there are several forces at play:

• Facebook’s demographic – Facebook appeal was very much a generational thing.  When it was free to use, advert free, and perhaps most importantly, new, it built huge user volumes.  But the day it went public it lost much of its appeal.  Suddenly it had become part of the mainstream corporate world, users became targets to be exploited.  Not only did it lose much of its street-cred, it lost a large part of the next generation of potential users.

• Facebook’s investors – investors piled into Facebook stock in the anticipation that all that Big Data must be capable of generating revenues.  And they’ve been proved right – it can generate huge revenues.  But to continue doing so, it needs constantly to refresh its demographic.  Whatsapp’s 450 million users, and growing, are a part of the next generation, the ones Facebook’s traditional offer couldn’t attract.

• Facebook is a cash cow.  And cash is an unproductive asset – it needs to be used if it’s to generate any kind of return.  Buying access to the next generation of internet users is as good a use as Facebook can make of the cash it generates.  The Instagram acquisition followed the same logic.

Can this model work in the longer term?  The difficulty I have with the Facebook model is that I can’t actually see how payback can be achieved.  $19Bn for a database of 450 million users requires income of over $42 per user simply to recover the outlay.  Sure, the 450 million might grow, could even double – implying 1 in every 8 people on earth using it – but there’s always competition, existing and new, and as with all technologies, the time one has to generate payback is limited.  Facebook itself is just 10 years old, and it’s already joined the Establishment, thus diminishing its attractiveness to new users.   Will Whatsapp still have a significant presence in 10 years’ time? Will its current user-base still provide Facebook with Big Data it can exploit in 10 years’ time, even when they’ve moved to new platforms?  Will whatever’s left of Whatsapp’s userbase have any value at all in 10 years’ time?  And if it doesn’t, what’s the mathematical modelling that tells Facebook this deal is worthwhile?  Even at just a 10% Internal Rate of Return, Facebook needs to generate on average over $3bn per annum of additional revenues for the next ten years to make this work.

My guess – this will be one of a series of acquisitions Facebook will be forced to make over the next five to ten years, simply to stay in the game of capturing Big Data that has the potential to be exploited. Further, each time it makes a substantial acquisition it will be speeding up the next generational shift in users – tomorrow’s twenty-somethings simply won’t use the platforms today’s twenty-somethings do.   And ultimately investors will realise that social media cannot generate a commercial return commensurate with the capital they’ve thrown at Facebook.

That’s the trouble with cash cows – how’d you spend the money sensibly?