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This article is written by Vinay Yerubandipursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Amitabh Ranjan (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction : big tech companies and acquisitions

Acquisitions have always been a crucial instrument for wealthy corporations to unlock more and more wealth. Moreover, big tech companies like Facebook, Amazon, Microsoft, Google and Apple are heavily cash-rich and always look to take over other companies with this extensive capital. In the past three decades, these five companies have accounted for more than 800 acquisitions. Even during the covid-19 pandemic, these companies continued to make acquisitions actively. Microsoft and Apple stand ahead in this list by making nine acquisitions each since the beginning of 2020. 

Story of Facebook’s acquisitions

Facebook was started by Mark Zuckerberg in the year 2004 as a small social networking domain for the students of his college. Since then, Facebook has entered many industries like artificial intelligence, virtual reality and many other industries through its acquisition of various other companies. A predominant reason that helped Facebook for its success and dominance is its constant desire for improvement and expansion. 

While its social networking site was the bread and butter of Facebook at the company’s inception, the company is so much more than that today. Facebook has made 91 acquisitions in the past 15 years. Most of them are talent acquisitions. WhatsApp stands as the biggest acquisition of Facebook till date. Some of the recent acquisitions of Facebook include Downpour Interactive, Unit 2 Games, BigBox VR etc.

Yahoo’s offer to acquire Facebook – quick story

In July 2006, Facebook had received an acquisition offer from Yahoo for 1 Billion USD. During that time Facebook had a three-member board with a 22-year-old founder and 2 investors. Both the investors were interested in the deal but Mark Zuckerberg without any hesitation said that “Yahoo had no definitive idea about the future. They did not properly value things that did not yet exist so they were therefore undervaluing the business” and rejected to move with the offer. Until then Facebook didn’t have even one acquisition under its name. Fast forward to 2021, Facebook is one of the richest companies in the world with a market capitalization of over 1000 Billion USD. This can be said  to be the reason for the existence of Facebook as it is today. 

Facebook’s journey with acquisitions

The timeline of Facebook’s acquisition can be described in three phases:

1. The Beginning(2006-2009)

Facebook started its acquisitions slowly and by acquiring small companies in 2007. Parkey, a company working on Offline Applications and Web OS was Facebook’s first acquisition in July 2007. This has helped Facebook develop a media transfer system in its social networking business. In the next two years, Facebook had made two acquisitions namely U connect, a social networking site and Friend feed, a real-time feed aggregator. These helped Facebook in making its principal business of social networking more effective and efficient. 

2. Consolidation (2010-2011)

This is a phase where Facebook had started to focus seriously on acquisitions. It had acquired more than 20 companies in these two years. In this period Facebook’s acquisition strategy was mainly focused on improving its website experience. Facebook’s acquisition objective in these two years can be understood the below acquisitions:

  1. Octazen Solution‘s acquisition helped Facebook’s users to easily invite their contacts to Facebook. 
  2. Divvyshot was a group-sharing photo site that helped Facebook’s users seamlessly share photos from the mobile app. 
  3. Facebook acquired Chai Labs to get its talent who had worked with Google Adsense to assist Facebook in its advertising revenue stream. 
  4. Hot Potato‘s acquisition helped Facebook in integrating the ability to check-in at locations and improving Facebook’s status update technology. 
  5. Rel8tion’s acquisition is aimed at improving Facebook’s Advertising System in its mobile platform.
  6. Beluga was a messaging application and is now integrated with Facebook’s messenger application after the acquisition. 
  7. Snaptu, a mobile application developing company that was acquired by Facebook in 2011 to develop Facebook’s mobile application. 

Similarity, we can find in all of the above-mentioned acquisitions is that Facebook made all these acquisitions to consolidate its products but never made an acquisition to expand its products.

3. Expansion(2012-Present)

Until now almost all acquisitions of Facebook are aimed at acquiring talent or products which helps in developing its social networking site. But, from the time of the acquisition of Instagram by Facebook, Facebook had diversified with its acquisition objective. Until this stage, Facebook had never acquired another company for expansion. But, at this stage, the key focus of Facebook is on the Question – How to capture Market Presence in various business areas? There were quite a good number of acquisitions made by Facebook in this phase to improve its own business, but they were very small in deal size when compared with acquisitions that are aimed at expansion like Instagram, WhatsApp and Oculus VR.  

This started with the acquisition of Instagram, a Photo-sharing social networking platform for a whopping amount of USD 1 Billion in the year 2012. This was the biggest acquisition of Facebook till then. Forbes also reported that this acquisition may be the best internet acquisition ever made. Over the period Facebook became successful in unlocking Instagram’s wealth and also avoiding great competition from Instagram by making this acquisition.

After Instagram, WhatsApp  was acquired by Facebook for19 Billion USD in February 2014. This is considered as one of the biggest acquisitions in the tech industry and also the biggest acquisition for Facebook till now. Investopedia reported this transaction as the Best Facebook Purchase ever. 

Facebook acquired Oculus VR in the year 2014 in a 2 Billion USD deal. This marks the entry of Facebook into the Virtual Reality Industry. Facebook stated that “Both Companies hoped to deliver the world’s best virtual reality platform in terms of social media, communications, gaming and entertainment powered by transformative and disruptive technology.” Facebook’s Founder Zuckerberg called this a historic acquisition as virtual reality technology is going to impact us in our day-to-day activities and lifestyle in near future. Still, Facebook is investing in Oculus Studio in large quantities and acquiring other small companies like Ready at Dawn, Downpour Interactive and BigBox VR which will be useful for developing Oculus Studio’s Products.   

Another big acquisition by Facebook is the acquisition of CTRL-Labs in the year 2019. The size of this deal was not disclosed but it is reported that Facebook may have spent between 500 Million USD and 1 Billion USD for acquiring CTRL Labs. CTRL Lab had a proven record of building interfaces where users can control computers with their thoughts. This acquisition was in line with Facebook’s augmented Reality Initiative. The acquisition of Oculus VR and CTRL Labs may not give an early return to Facebook but the supplementation of Facebook’s database with those companies can result in disruptive technology solutions in the long term as Virtual Reality and Artificial Intelligence are considered to be the Technologies of the future.    

Other important acquisitions of Facebook in the past decade include Giphy, Kustomer, Pebbles, Onova, Little Eye Labs, LiveRail, Redkix which supplemented Facebook in creating effective communication services. 

Facebook’s acquisition strategy

Facebook’s Founder Mark Zuckerberg believes that “the biggest risk in a fast-changing world is not taking any risk”. This valour attitude towards risk-taking helped Mark Zuckerberg and his large team to establish Facebook as one of the biggest Tech Companies around the world. 

Mark Zuckerberg disclosed Facebook’s four main acquisition strategies in a court testimony in 2017. 

  1. Build strong relations with the founders of the Target Company. This aspect is very important while we are having competitors. Because this relationship is what differentiates us from our competitors. 
  2. Both the Acquirer and the Target Company shall have Shared Vision.
  3. Facebook sometimes uses scare tactics over small companies by making them imagine how difficult it will be to run their business alone.
  4. Move fast in the process of acquisition. This is because if the company drags the deal process then competitors will come into the picture and will offer something more than what Facebook offered to the Target Company. This may lead to the deal being more costly or another company making the acquisition. 

The future 

At present, it is completely unclear for outsiders to ascertain the markets which Facebook is aspiring to enter in the near future. But, Facebook had enough money in its account which is greater than the annual GDP of many countries to make new acquisitions. Facebook is still required to prove its products in Artificial Intelligence and Virtual Reality which may be seen as the industries where Facebook may burn a lot of dollars in the coming few years.

Conclusion

From the journey of Facebook, we can understand that the Founder’s vision towards the Future is the biggest asset that any company can have. All these big tech disruptions by Facebook have started from a small dorm at Harvard University by a young student and right now, Facebook is already at the peak of the mountain and is showing no sign of coming down. The days coming ahead will only be more aspiring for Facebook to unlock more and more wealth. It may not be an exaggeration to say that the day is very near where every household in the world will be using at least one product of Facebook.

References

  1. History of Facebook Acquisitions, WebFX
  2. Peter Thiel Talks About the Day Mark Zuckerberg Turned Down Yahoo’s $1 Billion, Inc.com
  3. Mark Zuckerberg explains Facebook’s secret for acquiring companies, Business Insider India
  4. Acquisitios by Facebook, Tracxn
  5. Facebook’s acquisitions on its journey to perfection, Villanova University

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