Top 5 Facebook Acquisitions

  • A look at Facebook acquisitions in the past few quarters.
  • Recent acquisitions of Facebook and how they will benefit the social networking giant.
  • Benefits and pitfalls of this acquisition strategy.

Facebook (NASDAQ:FB) is the primary destination for social networking and Zuckerberg's vision for making it the number one destination has been helped to a large extent by the Facebook acquisition strategy. Facebook acquisitions includes some big ticket purchases like WhatsApp where it spent a whooping amount of $19 billion to buy a firm which was not yet profitable

All of these Facebook acquisitions are geared towards making it a more interactive, diverse and indispensable social platform for the end users and advertisers. Facebook's acquisition strategy and conscious unbundling of the core website will drive Facebook valuation in coming years.

Let us look at the top 5 recent acquisitions of Facebook to better understand how this acquisition strategy has added value to Facebook's offering.

  1. WhatsApp

whatsapp subscriber base
Subscriber increase for WhatsApp from April 2013 to January 2015

This was the mother of all acquisitions. Spending $19 billion on a firm which does not have a profitable business model would give a sense of déjà vu to the heydays of tech acquisitions in late 90’s. However the valuation of this company should not be done on the balance sheet alone. Whatsapp acquisition price took into account the 450 million customer base it had at the time of its purchase. This user base has increased to 700 million after less than a year of purchase.

Facebook has not as yet started to monetize the company. WhatsApp revenue stood at $15 million in the first half of last year, while losses stood at $230 million! However, with such a large user base a lot of monetization options are available. One simple way could be to start voice calling on the lines of Skype. A million users sending messages, voice, and other data should provide a good backbone to build a revenue stream. Another option is to start a payment gateway which could prove to be a serious threat to Apple Payments Network and PayPal. Facebook has already hired PayPal president David Marcus to run the messaging services which shows that Facebook could be actively considering this option.

Finally WhatsApp can also look at enterprise suite where it will allow employees to work within a secure, encrypted environment with low costs for communication. This can be similar to the email services of Google for enterprise users. It remains to be seen how 2015 turns up for WhatsApp and Facebook. Facebook has already mentioned that it would see an increase in its operating expense and a part of it would have to do with investments in WhatsApp.

  1. Oculus VR

Facebook spent $2 billion in purchasing Oculus, a virtual reality company. The social network is paying $400 million in cash and $1.6 billion in Facebook stock. There is an additional cash and stock incentive of $300 million if the firm reaches the milestones agreed. Mark Zuckerberg quoted:

“At this point we feel we're in a position where we can start focusing on what platforms will come next to enable even more useful, entertaining and personal experiences”

Facebook does not have any immediate plans of monetizing this segment. Till now Oculus was focused on the gaming industry. Facebook will accelerate Oculus' growth by helping the company build out their product and develop partnerships to support more games. Currently the device is being sold to developers enabling newer applications to be built by the developer community. The actual profit from this segment might be a couple of years away but by taking a bold step in new technology platforms Facebook has made sure it does not lose out on future revenue generating possibilities.

  1. Instagram

Instagram MAU
Increase in monthly active users for Instagram from January 2013 to December 2014

Instagram was purchased just before Facebook's disastrous IPO for $1 billion. There were mixed reviews at the time of purchase about the value addition and the price of the acquisition. However this has been one of the biggest jewels in the list of Facebook acquired companies. Instagram’s user base has hit 300 million monthly active users. This is higher than Twitter and on top of that Instagram has 1.8 times the engagement levels which a general user has on Twitter.

The full roll-out of advertising on this platform is not yet complete but with the above statistics and with a reasonable growth potential it should be an effective channel for brands. This mobile photo-sharing and video-sharing application has been especially popular with teens and younger demographics. As the growth of Facebook has peaked in developed worlds, a regular gripe is heard among the youngsters that all the family members are there on Facebook which reduces the inclination to interact. Instagram has helped Facebook keep a distinct hold on the younger users by keeping subtle differences.

  1. Wit.ai

Wit.ai is one of the recent acquisitions completed in January 2015. It converts speech and text into actionable data. A Facebook spokesman quoted:

"Wit.ai has built an incredible yet simple natural language processing API that has helped developers turn speech and text into actionable data. We're excited to have them on board."

Wit.ai lets users interact with apps, wearables, and messaging tools via voice, while learning human language from each of its interactions and could help Facebook develop voice features for Messenger and help the Facebook developer community. Facebook could also use this technology to build voice-activated features into its navigation. Facebook feel that natural language is a big part of building amazing experiences for the over 1.3 billion people on its platform.

  1. Parse

Facebook acquired Pares for a sum of $85 million. By buying Parse Facebook has ensured that it gets real time data on which type of apps are getting the highest following. This will also provide it with an opportunity to buy these apps before they become huge and worth billions of dollars.

Huge number of apps like Food Network, iBart, Anypic and more are hosted on Parse. This also makes it easier for the App to integrate on Facebook. It will also help in the monetization of these apps which can build an additional revenue stream for Facebook.

Conclusion

Facebook currently has a market valuation of over $200 billion. This has allowed it to make big ticket acquisitions by doling out a small percentage of its shares to these startups. Social media platforms also require reinventing of their strategy every couple of years else there is consumer fatigue. Facebook has been successful in keeping user interest with its acquisitions and innovative ideas. As per the recent Nanigans report improved user engagement on Facebook will drive Facebook growth.

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Comments on this article and FB stock

ChuckXX
bullish
According to Yahoo Finance Facebooks market cap is around 321 Billion not 200 Billion. Iam long FB.
1 reply
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virendra
bullish
The above post was written around the last week of Jan 2015, at which time Facebook stock traded at $75. A rough calculation based on Facebook outstanding shares of about 2.808B, implies a market cap of close to $210B, which is closer to the author's number. The company has gained over 50% in value since then!!
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