Social network spend a fortune on a fortune on the fiveyear old instant messaging service . We got paul kedrosky, bloomberg contributing editor, also deals reporter cristina alesci. 19 billion. It is a huge number. How does facebook justify this . Number. It is a big i was just looking at the numbers last night, the largest Venture Capital based company in history which is remarkable, so the way to get at this kind of valuation is on a basis. 400 million users, maybe a billion by the end of the year, adding a million users a day. So on a per user basis, which is the metric we use with the instagram acquisition, dating back to these network of acquisitions come about 40, which puts it on par with apps of with other acquisitions of this area. Lets notw, cristina, forget that snapchat turned down 3 billion dollars from facebook. To that have an effect, cristina alesci, on the valuation for what we are seeing on whatsapp . It is unclear, but facebook needs to grow users, and how much they are going to pay for it, this is their number one priority. It is very clear from its acquisition that whatever product that people are on, facebook once to buy it. Any kind of gross product. This speaks to the fact that you know, they are willing to take a risk here. We dont know too much about internal financial situation is. Are they making money . It is tough to tell but what we do know is at least they have some revenue. Of thoseon users, some users are paying for the service, presumably. Not all of them, however, remember, the first year of the services for free, so you cannot just assume that you multiply one dollar by 400 million users and you have the equivalent of the revenue because we do not know exactly to your point with the revenue is this year. All, why did facebook need this . They have a chat service. I have chatted with you, cristina, on it. Why did they have to get something separate . Growth. 80 yearoveryear compound is the kind of growth that turns you into a facebook very quickly. If you look at how people are using the service, it is much more complex than a messaging service. People are sharing Something Like 600 million photos, sending billions of text messages. These are the kind of numbers that rapidly turns into a facebooklike service in very short order. They are saying this thing could rack up the leak this thing could rapidly be us. We cannot allow that to happen. We are going to buy it and this largely paper acquisition, Something Like 13 billion of this is in facebook paper, and that is really important. Walk us through that. It is still like, what, 4 billion cash . The cash portion is a smaller portion here. We have 12 billion in a stock, and this could be an indication that facebook things that its own stock is fairly or even arely valued because you limiting your downside here by using a lot of stock to do it. So this is actually a statement on perhaps where facebook shares are valued right now. They need to take advantage of that into a stock acquisition is a perfect way to take advantage of an expensive stock price. Very good point. Cristina, how did this deal come together . We were all kind of stunned when it crossed. We looked into 19 billion. How does a 19 billion deal come together . When i started reading some of the coverage, this was brilliantly spun in a way that zuckerberg and the founders of theyapp are best friends, take hikes together. At the end of the day, the founder of whatsapp is going to be on the board of facebook. It is somewhat unusual that a target company gets its feet on the by yours board. Board. He buyers it is smaller than facebook is. It is not like a merger of equals, not that this ever happened. Inple will have some say how facebook does business. And the founders of whatsapp were saying look, we will not do advertising on our platforms to matter what happens. They are reassuring customers. That is a really big point and it could be a real point of contention down the line further. How is it going to make money . You pay . 99 a year . [laughter] i dont think so. That would be lovely if that were the case because it suggests we do not have to worry about ads. My guess is you will sue some version of the promoted tweets and promotions and other things, industry monetization as the kids like to call it, showing up rapidly. Monetization at the kids like to call it. Were looking at a company that could be four times that size and potentially could generate very material revenue doing very twitterlike things within 12 months to 18 months. You mentioned the kids that is an important thing to cover here because kids these days are always looking for the newest thing. Snapchat has been very popular lately, whatsapp has been popular. Though you run the risk if you are facebook of putting all this money and the kids at Something Else by next year that they are using . Yeah, i mean, that is the really important point here. The rapid growth in four years is stunning, so there is your value. But if a company can grow this quickly and still have this fragile position with no real mode in the market, it also makes you wonder exactly where the value is here. That is the essential tension and all of these rapidly growing networks. What is their real motive get someone else doing the same thing . Reallywer is theres not one, but from facebooks standpoint, you cannot afford to take the option a la the of buying this before someone else does. It almost feels like the nightclub. While the kids are flocking to that. Six months. Right, so what is coming next . What does this mean for the Tech Industry as a whole . Obviously blackberry, i think the shares orose on this news because they were rumors they wanted to sell their messaging app. There are two camps out there. There are the camps in Silicon Valley that think that this is crazy and my give some people some pause or at least time to reflect on evaluations out there, and there are some companies that are just going to take advantage, they will try to go couple go public, they will try to get sold based on evaluation of this company. Why not . I am usually the most muchical it feels to me more about this groundswell that is mobile, that there is an incredible, unprecedented transition going on from desktop to mobile at this rapid rate and everyone is filling in all the pieces as quickly as they can in the face of google and others out there who will be trying to do the same thing. The next thing you know what, on a valuation basis, it is not that expensive. That seems like an absurd and to say at these prices, but it really is not. How can you say it is not that expensive . When you look at some of the valuation metrics. I am going to go back to looking at facebook, linkedin, and twitter themselves, look at them on a market capitalization for user bases and say they are trading at two and three times the price that you are buying a faster growing company, whatsapp , so purely based on a direct head to head comparison on a market cap per user basis, you say this is a company that could conceivably generate 1 billion in revenue off the user base that is twice the size of twitter. At twiceitself trading the valuation. So, you know, it looks like it is at a discount to the acquirer s own. You know a lot about m a and tags. I am sure there are some happy bankers. And to be honest, we were talking about this earlier, trish, there was no much work for the bankers to do. It was all Mark Zuckerberg going on hikes. That is what the story is anyway. It is unclear how much work they have done, but i have to say they probably have provided a lot of Free Services to facebook , meeting up to this deal, you know how it goes. It is a Client Service business. They probably provided other services before. Now they are getting paid for those services. Capitalequoia, sequoia were the only Venture Capital backers in this deal. They are doing what we call in the bid a 300 geithner on this thing. It is based on main it is a stunning return. That is unprecedented. Paul, they did not have any other Venture Capital bankers. Whatsapp i am sure could have raised money from other Venture Capital firms. I am wondering if you find that weird and if that is statement about the companys e those and how it wants to remain in control because the companys ethos and how it wants to remain in control because of they sold more they would have less control . Engineers,g like 30 30 four employees total, they have not spent a dime on marketing. Further, the founders had made significant money at yahoo , which they then turn around and put into the company themselves, so basically did not want the money in wanted the control. They end up with it and walking away with what like a 60 Million Investment turning, they hope, into 19 billion. Thank you so much, paul kedrosky, Bloomberg Contributor editor, and deals reporter cristina alesci. Right, moving and shaking at this hour, tesla motors and ceo elon musk reported Fourth Quarter earnings that Beat Estimates. They also revealed plans to wrap up reduction of the model s sedan. Shares are up more than 10 in premarket trading. Mr. Muska slope to in the loop mr. Musk spoke to in the loop betty liu. Selling to apple. I think that is unlikely. We will stay super focus on creating a compelling mass market electric car. I would be very concerned anin an acquisition scenario that we would become distracted from the task, which has always been the driving goal of tesla. Will have more from bettys exclusive interview later in the program, but first, we have a lot more ahead for you, including a look at your worst trouble nightmare. Airportuck at an ugly with no wifi. Why this is happening more and more. And we will bring you the very latest from the ground in key of ukraine, kiev in the what the u. S. Should be doing to help easily resolve this deadly conflict. I will see you right back here on in the loop this thursday morning. Welcome back to in the loop. I am trish regan. We are looking at the futures market which is lower as we get ready for the opening of trading. We have jobless claims coming out so we will be watching carefully for those or you. And a big deal to talk about this morning eight 19 billion deal in the tech space, facebook making a big acquisition. Here is a look at what we are following right now. Also walmart reporting Fourth Quarter earnings that beat analysts estimates. It was the First Quarter for a siteso Doug Macmillan who Economic Trends and higher healthcare costs. We will have more later in the program on walmart. Workers amid the debate about this National Minimum wage hike, the owner of Banana Republic and old navy will be raising wages to nine dollars an hour this year and 10 next year. This increase will benefit about 65,000 workers, but it falls just short of the president s request for a 10 tents and minimum wage 10. 10. Brianke america ceo moynihan is making a lot more than a minimal age. He made 14 million in 2013. A 17 increase from the previous year. He received a 1. 5 Million Dollars salary and 12. 5 million in a stock grants. President obama addressed the deadly violence in ukraines capital yesterday warning the military against intervening. On the phone from kiev, Bloomberg News managing editor, tom. Met bring us the latest. What is going on right now, is the three Foreign Ministers from the European Union from poland, germany, france, they are in a very intense meeting right now with president s yanukovych. We have been waiting on the streets at a barricade for them to come out for more than three hours now. They were supposed to brief us more than two hours ago. That seems to suggest they do have something to talk about, they are really trying to offer something that he may be able to accept. And the concern, of course, is that we are moving closer and closer to martial law. You have the president s fiery as army chief just yesterday and there is a lot of concern at the ukraine could erupt into civil war. Do you get any sense that the tension has died down as a result of this truce, or is visibly burning . The situation is clearly very tense. We dont have an official confirmation yet of the death toll, but it is definitely in the double digits. I talked to a photographer who was on the square it while ago, and he has seen in two different spots at least 20 dead bodies. Protesters that have been shot by snipers, and we also get reports that guns are being handed out to troops under , so therior ministry situation is very, very tense. At the same time, you know, we have to report that the mayor of kiev, he was installed by yanukovych, but he has now effectively defected. He has left the Yanukovych Party and has said he is no longer reporting to him, so, yes, there are signs that the regime is disintegrating, and, you know, for must be very warning yanukovych, and you do wonder what his next steps may be. It is significant. As you were just reporting, the mayor of kiev stepping down from yanukovychs party, distancing himself from the party, and you have to wonder how many people really are going to continue to support the president in this kind of environment. In the background of course as president putin of russia. How much influence is he having right now on yanukovych and the situation on the ground . Well, what were hearing from the European Union delegations, russia is involved in this. So whatever yeah, yanukovych may be able to accept in terms of an upset from the European Union, that will have to be agreed with russia in one form or the other. So i think this is also why the meeting here is dragging on for so long. There is definitely some back channel talks going on between yanukovych and putin. F putin ismately, i a really pushing for yanukovych can one anticipate that this conflict is going to drag on for much longer in that they have for the president has the support of russia, which is so significant right now . Yes, definitely. Unpredictable what will happen. Rocket soings have a quickly over the past 48 hours. You can see that the region and theirst have declared independence from the yanukovych regime. At the same time, some of the eastern regions have said it is imaginable that they may seek it is veryussia, so difficult to predict. Will continue to talk to you, hellmuth. Will he back with more in the loop we will be back with more in the loop after this. Welcome back, everyone. You are watching in the loop live on Bloomberg Television, streaming on your tablet, your phone, and bloomberg. Com. Regan in for betty liu. It is 26 minutes after the hour which means Bloomberg Television is on the market. This is ahead of jobless claims coming out at 8 30 eastern time this morning. Treasuries rebounding this year after falling yesterday. You get yields rising after the last fed Meeting Minutes released, showing there is little chance they will scale back plans to reduce their bond buying program. We will be on the markets again in 30 minutes for you. 2013 the driest marks the driest year in californias history. President obama visited the usually fertile Central Valley. It saw 50 unemployment five years ago during the last big drop. Anker erikers schatzker joining us with more. Myself justen for what the worst drought in a century looks like. I am telling you it is writing. Water iser or the lifeblood for all of us but water is the lifeblood for california, and if the reservoir here if the reservoirs are the blood bank, it is drastic. 50 rvoirs are in most cases below where they are supposed to be at this time of year. The reservoirs hold the water that comes out from the north, the snow that falls in the northern sierras, and collects in the reservoirs to be able to in therted to Farmers Central valley. I want to share with you the perspective of a guy named joe dell bousquet. He is a man whom president obama went to see last week when he wanted to get a sense of what the drop in california is like. Is joe talking to me about the Economic Impact of this catastrophic doubt. If i leave this 60 bakersfield title, this 60acre field could produce anywhere to 65,000 boxes of cantaloupe. Somewhere around 450,000 just on this one field. That is revenue that does not come all to me. A lot of it goes to the people because you have a lot of hand labor. They are earning their wages. But it also impacts truckers and that haul it to markets, it impacts the people who make the baucas that we pack them in, suppliers make the boxes that we pack them in, suppliers and the local town. If we do not plans, we do not buy tractors or pickups. I like to buy one tractor in one pick up every year to keep the fleet updated a little bit. In dry years, we do not buy anything. The thing. Ere is those reservoirs provide the only source of water to people , so thel dell bousquet state Water Authority and the federal water authorities turn that access to the water off, he is faced with a terrible choice. A sophies choice, as he put it, to decide what and what not to plant. Math,s he cannot do the for example, but lots of people have. The farm bureau, for example, in Fresno County, estimates of this drought is going to cost farmers 1. 5 billion of revenue, and joe was talking about the market wire about the multiplier effect. The impact on Fresno County alone is going to be 5 billion. Now take Fresno County and multiply it he says there are many other agriculturally throughoutunteies the state of california will be feeling a similar impact from the worst drought in a century. You just have to go to the sierras and see it for yourself. There is no snow up there. So the situation is battle ready in about two get much more critical. It is pretty