Why Facebook Spent 22 Billion+ on 14 Companies

It’s hard to believe Facebook’s been around for over a decade.

Sure, ten years isn’t all that long, but in the short history of the Internet a decade is quite a long time. Not many social media networks can boast that kind of longevity.

Back in 2004 when Facebook was launched, AOL, Hotmail, MapQuest, and Ask Jeeves still reigned supreme. The Facebook, as it was first named, was at first meant to be a social network just for college students, but after spreading like wildfire at Harvard University, it soon expanded, first to other Ivy league universities and then quickly into schools in the UK. Then in 2006, it was opened to anyone with an email address.

Facebook has spawned several controversies over its rise to ubiquity, including concerns over privacy, whether it’s okay to use “friend” as a verb (turns out English speakers have been doing that since the 16th century), lawsuits over allegedly stolen source code, and psychological experiments on its users. There’s even a whole separate Wikipedia page for Criticisms of Facebook.

And yet millions of people keep using it. In fact, Facebook continues to grow. Profits have passed $1 billion, and the network now has more users than there are people in the entire country of China.

And Facebook’s growing in not just its userbase. Since the site’s beginning in 2004, Facebook has spent $22 billion on acquiring about 50 companies. Many of the companies they’ve purchased make perfect sense as complements to their own features and services, like WhatsApp and Instagram. But others are a bit more puzzling… Why exactly did Facebook purchase Oculus Rift, a virtual reality headset?

Looking at the bigger picture, why the focus on all these mergers and acquisitions? What exactly is Facebook hoping to accomplish with this buying spree? Check out the details below and see if you can connect the dots.

Facebooks-Buying-Spree

Why Facebook Spent 22 Billion+ on 14 Companies

Facebook is the number one social media network, but they haven’t gotten there alone. Through around 40 acquisitions dating back to 2007, the company has continued to grow and profit.

How Mergers and Acquisitions (M&A) Work

  • Companies merge to create single entities. The idea is that by merging into a single company the “new” company will be more valuable than the two companies were separately.

    • Things don’t always work out this way.
      • Mergers can fail because:
        • Executives get spread too thin and can’t focus on the company in the way they need to in order to promote growth.
        • Studies show cutting costs is often a main focus right after a merger, and this can cause revenue (and profit) to decline.
        • Employees from the different companies may not come together in the new environment well, causing decreased productivity and overall low morale.
  • The Board of Directors buys companies. The Board of Directors agrees to buy another company typically to fill a gap in products or services.
  • M&A’s aren’t typically a one-time cash-out deal. Most deals have 2-3 year retention, vesting, and re-vesting programs, and potentially 2-3 year earn-outs. It’s safe to assume that if you’re acquired, you’ll have a 2-3 year commitment to the acquirer.
  • M&A’s can change at the drop of a hat. Your company may be a good fit right now, but as company priorities change, declining a deal when it’s offered may mean the deal doesn’t come back.

WhatsApp

  • What is it? Cross-platform mobile messaging app

    • Over 450 million people using the service each month
    • 70% of those people active on a given day
    • Messaging volume approaching the entire global telecom SMS volume
    • Currently adding more than 1 million new registered users per day.
  • Acquired: February 2014
  • Price: $19 billion
  • Terms of the Deal

    • $4 billion in cash
    • $12 billion in Facebook shares
    • An additional $3 billion in restricted stock units to be granted to WhatsApp’s founders and employees that will vest over four years subsequent to closing.
    • WhatsApp co-founder and CEO Jan Koum will join Facebook Board of Directors
    • WhatsApp will continue to run independently and maintain the brand.
  • Why Facebook Jumped
    • Facebook and WhatsApp have a “shared mission to bring more connectivity and utility to the world by delivering core Internet services efficiently and affordably.”
      • Facebook hopes it will accelerate growth and engagement for both companies.
    • Facebook is likely headhunting talent.
    • They want to acquire new technologies to improve on their existing features.

Branch Media

  • Branch Media is the company behind two products:
    • Branch: a conversation service
    • Potluck: a link sharing service
  • Acquired: January 2014
  • Price: ~$15 million
  • Terms of the Deal: Undisclosed

    • Branch and Potluck will continue to live on outside of Facebook.
    • Branch Media is building a “Conversations Group” for Facebook, and is based in New York City.
  • Why Facebook Jumped
    • This is not a full acquisition, because the team has joined Facebook.
      • Facebook claims this was purely a talent acquisition.

Face.com

  • What is it?: Facial recognition software
  • Acquired: June 2012
  • Price: $55 to $60 million
  • Terms of the Deal:

    • Mix of stock and cash
  • Why Facebook Jumped
    • Talent and technology acquisition
    • Improved their own face recognition abilities for tagging friends in photos.

Hot Studio

  • What is it?: Top design agency based in New York and San Francisco
  • Acquired: March 2013
  • Price: Not disclosed
  • Terms of the Deal: Not disclosed
  • Why Facebook Jumped
    • Talent acquisition
      • LinkedIn reports 114 employees; Facebook’s largest talent acquisition
    • Chance to improve their design

Instagram®

  • What is it?: Highly popular photo sharing website featuring 200 million monthly active users, 55 million photos uploaded daily, and 1.2 billion daily likes.
  • Acquired: Announced in April 2012

    • Officially closed in September 2012
  • Price: $1 billion
  • Terms of the Deal

    • $300 million cash
    • Remainder in Facebook stock
      • At the time, stock traded for $18.36/share making the deal worth ~$736 million.
  • Why Facebook Jumped
    • To enhance their own photo sharing features
    • To prevent a competitor from getting it first

Parakey

  • What is it?: Web-operating system that makes image, video, and writing transfer to the web easier
  • Acquired: July 2007

    • Facebook’s first acquisition
  • Price: Not disclosed
  • Terms of the Deal: Not disclosed, though it included both the technology and the talent behind Parakey.
  • Why Facebook Jumped
    • To integrate the technology with their Facebook Mobile app (launched in July 2010)
      • Enhance their own services
    • To have talent that worked on the Firefox browser backing their team.
      • Talent joined Facebook to build the Facebook developer platform.

FriendFeed

  • What is it?: Real-time news feed that consolidates updates from a variety of social media sites
  • Acquired: August 2009

    • Facebook’s second acquisition
  • Price: $50 million, terms not disclosed
  • Terms of the Deal:

    • All FriendFeed staff joined Facebook
    • FriendFeed founders joined Facebook’s engineering and product departments with senior roles.
    • FriendFeed continued to operate while long term plans were developed.
  • Why Facebook Jumped
    • Integration of features, things such as the “like” button, updated news feeds, etc.

Octazen

  • What is it?: Contact importer that returned a list of contacts to make inviting friends from other platforms to services easier
  • Acquired: February 2010

    • Facebook’s third acquisition
  • Price: Undisclosed
  • Terms of the Deal: Undisclosed
  • Why Facebook Jumped
    • Facebook says this was a talent acquisition
    • Octazen says it was a technology acquisition, to move the technology in a “different direction.”
    • Facebook expanded features, making it possible to:
      • Sign into other services with Facebook login information
      • Invite contacts from other platforms to be friends on Facebook
      • Find people you may know and invite them to connect with you
      • Find long lost contacts and invite them to connect with you

Honorable Mention: Friendster Patents

  • What it is?: Network of social media patents including advertising, virtual payments, etc.
  • Acquired: Aug 2010
  • Price: ~$40 million

Honorable Mention: Sharegrove

  • What it is?: Private conversations website, integrated into Facebook Groups feature
  • Acquired: May 2010
  • Price: Not disclosed

Honorable Mention: Sports Stream

  • What it is?: Platform to capture sports chatter
  • Acquired: December 2013
  • Price: Not disclosed

Honorable Mention: Oculus VR

  • What is it? A startup that creates virtual reality headsets and other technologies
  • Acquired: Deal announced March 2014
  • Price: $2 billion
  • Terms of the Deal:

    • $400 million cash
    • 1 million Facebook shares
  • Why Facebook is Jumping
    • They plan to take Oculus beyond gaming and use it for other experiences.

Honorable Mention: Moves

  • What is it?: A fitness tracking app
  • Acquired: Deal announced April 2014
  • Price: Not disclosed
  • Why Facebook is Jumping
    • They are using Moves to expand their multi-app strategy.

Why Facebook Acquires Technology and Talent

  • Talent acquisitions to build and strengthen Facebook features
    • Talent acquisitions:
      • Bypass issues with U.S. visa work regulations and;
      • Alleviate the shortage of killer programmers in the U.S.
  • Maintain existing user base and reach new members
  • To increase value for investors

Why Companies Sell

There are many reasons why a company could agree to sell to another, including:

  • A business owner is tired of running the business
    • Owner may be getting older and unable to run the business as he or she intends
  • Gain market share
    • Selling to a larger company may assist in brand recognition and create leverage
  • Financing an expansion
    • Fund new equipment
    • Fund advertising
  • Gain capital for an acquisition
    • Get the funds to acquire smaller competitors to consolidate an industry
  • Diversify products and services
    • Additional products and services allow a company to reach more customers and generate more revenue.

Why Valuations Aren’t What They Seem

  • When Facebook places a value on something, only part of the offer is cash. The rest of the offer is done in Facebook stock, which fluctuates in price on a regular basis.
  • Facebook bought Instagram for $30 a user.
    • If Facebook can monetize the system to earn $100/user, they’ve made an excellent acquisition.
    • Other companies may not place the same valuation.
      • Microsoft® or Twitter® could not have leveraged Instagram the same way–Facebook users share pictures all the time.
        • They would not place such a high valuation on the platform.

Sources

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